Q. What happens if you miss the 2-5 year post-residency window but still want to “get on board?”
A. This question refers to the easiest, most sure, nearly guaranteed method of becoming a wealthy doctor, also known as “Live Like A Resident.” When using this technique, you do the following.
How to Live Like a Resident and Get Rich
- Finish residency
- Get an attending job
- Work hard at said attending job and make good money
- Continue to live the same lifestyle you lived as a resident (i.e. spend something like $50K per year)
- Take the difference between what you earn as an attending and what you spend as a “resident” and use it to build wealth – paying off student loans, saving up a down payment on the dream home, and maxing out retirement accounts
Typically, if you will do this for 2-5 years after you finish residency/fellowship/dental school, you will no longer have student loans, be living in your dream house, and have a six-figure nest egg beginning to compound. Do it for a decade and you'll likely be financially independent at that “resident” lifestyle.
I Didn't Get the Memo
Unfortunately, many of my readers didn't get the memo. They didn't get it in med school. They didn't get it in residency. They didn't get it within the first few years out of residency. But somewhere in their late 30s or even their 40s, they realized they didn't know anything about money, still had student loans, and were on track to be one of the 12% of doctors in their 60s with a net worth under $500K. What now?
Well, the truth of the matter is that “Live Like a Resident” will work at any time. It works better right out of residency for two reasons – # 1 You haven't become used to having more than $40-50K a year to spend and # 2 You have more time for your savings to compound. But it certainly works better at 35, 40, or 45 than it does at 70 or 75 when you're forced to live like a resident on Social Security.
The Minor Stuff
So what's the big issue? Well, there are probably some minor things you'll need to fix.
- Perhaps you'll need to fire a salesman masquerading as a financial advisor.
- Maybe you'll need to dump a whole life policy and get rid of some individual stocks or high expense ratio loaded mutual funds.
- You'll probably need to become financially literate.
- You'll almost surely need a written financial plan, do a few rollovers, and buy and sell a few mutual funds.
- Perhaps you'll even need to buy some term life and disability insurance.
- Maybe you'll still need to refinance some student loans.
The Main Thing
But honestly, all of that pales in comparison to the main thing. The main thing is you're going to have to spend less money. And while that may be simple, it's not easy, and it is much harder to cut spending five years out of residency than it is to never grow into that income in the first place. The only question is really how much you are willing to cut. The more you cut, the more quickly you build wealth. You don't get a pass on math.
At a minimum, you need to carve out 20% of your gross income for retirement. Even if you spend a decade or two paying off your student loans and mortgage, you're eventually going to need some kind of a nest egg to supplement Social Security.
Better yet, you'll carve out that 20% plus enough to pay off your student loans (and heaven forbid any credit card or auto loans) within the next five years. Perhaps that's 30% of your gross income.
And perhaps, if you're really serious, you will actually go back to a resident average American level of spending while earning like a doctor.
So how do you get there from here?
There's no magic formula. Well, there is, but you missed it. (Live Like a Resident right out of residency.) So now it's a Choose Your Own Adventure Book. I can tell you this–the most successful people who do this begin with the big rocks. The more of those you're willing to take a step back with, the better this is going to go. Let's take a look at some of them. I'm sure I missed a few (be sure to read the comments!)
16 Ways to Build Wealth and Be Financially Successful If You're Behind in the Game
#1 Move
This one is pretty drastic, but done well, can solve three, four, or even five of the big rocks all at once. Few are willing, but I wish more would at least consider it. I had a sad email not long ago, from a doc who moved from NYC to SF and felt desperate due to her debt. Newsflash! Moving from one coast to the other does not constitute geographic arbitrage. I'm not going to get into all the ways moving helps here, but you'll see that it facilitates the next 5 big rocks.
#2 Get a Job That Pays More
Back in 2009, Katie and I were on track to become financially independent at 52. Then I took a partnership job and when I made partner, I started getting paid a lot more than the $225K/year our original plan called for. Then I started a blog that started making lots of money. End result? We hit our “number” at 42 instead of 52. Despite the increased taxes and increased temptation to spend, there's no doubt that making more money speeds up the process. I'm amazed how many doctors are working for less than half the average in their specialty while struggling financially. A “job you love that pays crummy” is a luxury you cannot yet afford.
#3 Lower Housing Costs
The big problem with this one is that it requires moving, at least a short distance. A major part of most budgets is housing. This includes rent, mortgages, maintenance, upgrades, insurance, landscaping, and property taxes. It should be no surprise that the smaller the house and the less prestigious the neighborhood, the less you spend on all of that. Only you can decide if your situation calls for something this drastic, but there's no doubt you can dramatically decrease spending by concentrating on housing, especially if you're willing to leave a High Cost of Living Area for a Low Cost of Living Area.
#4 Lower Your Taxes
There are other methods of lowering your taxes too, like investing more efficiently, maxing out retirement accounts, and becoming an S Corp that you should give serious consideration to.
#5 Stop Paying for Private K-12 Schools
I know. The schools in your town are terrible. Just last week half the sophomore class was wiped out by zombies and the average ACT score coming out of there is only 28. That's why Little Joey and Baby Sue are in the best private schools money can buy. You make $140K. There's no reason you can' t put them both in $30K/year elementary schools is there?
Seriously though, this one combines well with moving too. Guess what's crazy? You can actually move somewhere that pays you more, that charges you less in malpractice, that offers better housing at 1/4 the price, offers better public schools, and lowers your taxes all at once. You don't have to go from San Francisco to Chelsea, South Dakota either. San Bernardino and Las Vegas aren't very far apart but have dramatically different tax and housing burdens. [Please don't send hate mail if you love San Bernardino or San Francisco or hate Las Vegas. If you live in Chelsea though, feel free. I can handle all 27 of those emails.]
#6 Start Budgeting
I get lots of emails from doctor families struggling on an income of over $300K. They usually have two things in common. The first is a lot of debt. The second is they don't live on any sort of a written budget. They often have no idea what they spend. Guess what? That which is measured, improves. You'd be surprised how much money you're hemorrhaging on stuff you don't even value that much.
#7 Quit Paying an Advisor
This one is usually a big rock, just because even good financial advice tends to be expensive stuff. I met with a doctor who wanted to start managing your own investments, which was good because not only was her advisor charging her 1.5% on her $500K portfolio ($7,500/year) but was giving her bad advice. There are definitely ways to lower the costs if you really need financial advice, but if you're going to get serious about this finance stuff, you might as well learn how to do it yourself. It isn't that hard if you have enough interest. And an extra $7,500 a year goes a long way for most of us.
#8 Downsize the Cars
Not your car if you're living like a resident
Another common scenario – Two $30K+ cars with $20K+ notes on them. This is far less hassle than moving, but if you sell both of those cars and buy two $10K cars, you'll eliminate both car notes and after a few weeks, probably won't even care that much about the change. And every time you see that beater, you'll be motivated to get ahead financially so you no longer have to drive it.
#9 Sell the Boat
I use “boat” here, but this may be something else in your financial life. Perhaps it's the sports car, the snowmobiles, or the 4 wheelers. Maybe the lake home or ski condo. These are the things that doctors who got their ducks in a row in their 30s bought in their 40s. You will be able to afford them eventually, but not right now and not all at once. The cool thing about selling them is you get some cash to use for paying debt or building the nest egg AND you reduce your ongoing expenses.
#10 Take Fewer, Less Expensive Vacations
Katie and I went nuts on vacations in 2018. For example, from mid-June to Mid-November (5 months) we went to Zion twice, Lake Powell three times, Moab, Wyoming, Arizona, Oregon, California, Florida, Hawaii, Denmark, Sweden, and Norway. However, we're financially-independent, multi-millionaires who are still working and making a great income. If you're trying to vacation like that and struggling financially let me introduce you to my friend “Go Camping at the State Park Twice a Year.” I haven't seen her in a while, but we go way back.
#11 Quit Eating Out
Did you know that some people eat out a half dozen or more meals a week? Mr. Money Mustache suggests you compare eating in a restaurant to renting out a restaurant and all its staff to celebrate a special occasion rather than to making food at home. You can stuff a lot of money down your esophagus in a hurry, especially when you're on vacation. Better to go to the State Park and eat hot dogs and s'mores. “But that's not healthy!?” Yea, well, neither is working 7 days a week up to 48 hours at a time until you're 75 in a dysfunctional hospital.
#12 Send Partner to Work
You're not where you want to be financially and you have someone with the ability to earn $50-100K+ per year playing video games in the basement or sitting around between dropping the kids off at school and picking them up? A stay at home parent may be a luxury you cannot yet afford.
#13 Get the Kids Out of Daycare
Diapers and baby food are expensive but other than private school tuition, few child-related expenses compare to the cost of daycare. You can save a lot of money by finding a way not to pay that. Maybe it's a family member or friend. Maybe it's just giving it time until those kids are in school. I don't know, be creative; it might be easier for you than downsizing the cars or moving to Vegas.
#14 Dump the Help
#15 Pull the Kids Out of Their Activities
I said there would be sacrifice involved, didn't I? You might be surprised to find out your kid doesn't care that much about that traveling basketball team, viola lessons, or cub scout camp. (Have I offended everyone reading this post yet by attacking their favorite pet expense?) This is another great reason to live like a resident early on, before those kids get old enough to start caring about this stuff.
#16 Be More Frugal
Use it up, wear it out, make it do, or do without. All of us can be more frugal. Maybe it's keeping your furniture for one more year. Maybe it's washing and reusing ziploc bags. I don't know. But surely there is some money you can squeeze out of that budget with a little effort. Everyone thinks they are frugal, but guess what, if you have a six-figure salary and you're struggling to build wealth (or even just make ends meet), by definition, you are not frugal. Go read some frugality blogs and you'll see what I mean.
This list could go on and on, but I think you get the point. You've got to find something you're spending money on that you value less than financial independence. Then quit buying it and invest the difference.
What do you think? What should someone who has already grown into their income do to become financially successful? Were you in this situation? What did you do? Comment below!
I personally cannot wait until #13 happens. Our second (of three) is out of daycare in about five months. The third one has another year or two. This cost is painful, but because we got the other stuff right (minus the cars) we have been doing really well.
You can afford to mess some of this stuff up, but certainly not all of it. And I have friends who ask me what they should do, but the answer (while simple) is not easy… Just like you said.
Behavioral Finance is 90% of the game with doctors. We aren’t bad at the math. We just have a hard time doing the right thing, which is why it is crucial to automate as much as possible and to figure out the savings rate we need FIRST. And then, automatically send the check each month to get to that savings rate and then live off the rest.
Instead most docs spend as much as they want and hope there is enough left to save. This is a sure way to be unable to retire by the 60-65.
Great article, and much needed!
TPP
One thing is that for many in this predicament it would take some deep cuts more than most “regular” people have to deal with. We spend less than we make and put away a decent amount but not at the FIRE level that many of you are doing. (I guess we’re financially secure but not financially independent). As a thought experiment I looked at what I would have to do retire in say 5-10 years vs 15-20 (more likely) and it would involve some serious changes.
The other thing I notice not on the list is moonlighting. For example, moonlighting for a weekend is enough to pay for landscaping and maid service for a year. For those who do not want to cut back this may be an option. (although these folks would need to not inflate their lifestyle to match their newly acquired moonlighting dollars or they will be in the same predicament).
The advice on missing the window of living like a resident is perfect. You can do it anytime so don’t be discouraged that you didn’t find out about this technique till later on. The biggest disadvantage that Jim mentioned was the time factor (which is even more precious as a physician since we already are behind the 8 ball with a late start as is). I didn’t make any financial revelations until I was 40 and within 5-6 years I turned it around quickly (helps to have a very high income and geographic arbitrage that I accidently fell into) but it is possible.
The great thing about savings rate is that it shoots up dramatically as long as you don’t go overboard with lifestyle inflation. As your networth increases and your capital starts working for you, it adds fuel to the fire (all that earned money from investments gets plugged right back into the “perpetual money making machine” which gets turbocharged).
The pursestrings now have definitely loosened for me because of it but you have to wait till you get to that stage first.
This might sound a little off base, but I think the timing of the Marie Kondo success/popularity couldn’t have come at a better time, and is very applicable to living like a resident. When we simplify our lives, find what brings us joy, and remove all of the unnecessary clutter, not only does it free our minds and makes our lives happier, but it helps us to really appreciate what is important, and living like a resident becomes much easier when you are not in a state of constant accumulation and spend with purpose on things that bring us job.
Even for those of us that are more simplistic and like clean, uncluttered decor and households, or that value experiences over things, it’s quite easy to get stuck in the habit of consumerism, but making purchases with purpose and being grateful for the things that we have (and thanking them for bringing us joy, even as we get rid of them) can help us be more financially independent and content with our lives.
Delayed gratification or “Re-delayed gratification” are likely necessary to make the financials work for physicians. The problem is you can’t count medical school and residency training as part of that delayed gratification process, even though it is certainly an intense exercise in delayed gratification. That’s a tough pill to swallow for some, it was not for me. I am thankful to have lived like a resident for about 3 years after training.
Love it. Reminds me of one of my favorite pieces of advice on here – as a doc you can buy anything you want, but not everything you want.
It was also good to see the number of apparently conflicting pieces of advice, really shows the many roads to Dublin. Both of you should work but you shouldn’t pay for child care – which one nets the most decrease in expenses or increase in income?
Also speaking as someone working a job I love for half the pay (Army), once you realize how little difference there is in quality of life to trade for the high increase in reimbursement, it snowballs and you start to find reasons to not actually like that job as much as you thought.
Yea, good point. Tough to do every single thing on there when they conflict. Whether it makes sense for a second person to work and pay daycare really depends on what that person makes eh?
We can always count on WCI for some “tough love.”
It’s easy to get caught up in the mental trap that we “have to have” this or our kids “need” that, but if you look around, you’ll see lots of people going without what you consider necessities and living quite well.
Cheers to relative frugality!
-PoF
Love it! Well said WCI and PoF! Frugality for physicians is just living like a regular person. It’s not that bad. And if you want, it can be temporary. It’s never too late to reverse course, stop drowning in debt, and find solid financial ground!
This post is a good addition to the blog. Your live like a resident message is great and absolutely works but so many people are past that stage already. Hopefully this helps get more people motivated to take charge of their financial life.
As someone who came in on the later side, I agree with most of what was written. As the saying goes: you can have anything you want but not everything you want. You can’t have nice toys, private school for the kids, an army of help, and a mega-home and expect to retire in 3 years with no savings!
The key for us was really looking at our lives and examining what was important. We sold our home, my wife’s business, and downgraded cars. We also moved to an area more conducive to travel with a much higher salary for myself. Coincidentally, there are more work opportunities for the mrs. as well. And we’ve decided to rent a home until we decide that this work and location will be our final stop.
There were at least two occasions when I Didn’t Get the Memo regarding housing. But then again, I finished fellowship in the mid 90s, well before WCI sent them out. The first time was when we bought the big house right out of training. Granted, the big house in the Midwest was $320k. The second time was when we moved to the coast 4 years later, and bought the second house before the first one sold. That was the most painful period in our financial lives. Vowed never to have 2 mortgages again.
Despite these mistakes, we wound up just fine 5-7 years from retirement. This involved cleaning our own house, driving some beater cars, managing our own finances, and having decent two physician incomes.
I know how you feel. I’ve had two mortgages before.
That’s what a lot of people may not realize. Most of the advice I give around here is stuff I learned the hard way. I’ve bought houses when I shouldn’t have, bought whole life insurance, mistook a salesman for an advisor, bought actively managed loaded mutual funds etc. I just happened to do it all early on with small amounts of money so I could quickly recover from mistakes.
I’m from Chelsea SD, and I got a chuckle out of this. (Obviously I’m talking about #5). You won’t be getting 27 emails, there’s only about 16 left there now! ?. Great financial advice!
Story of my life. What are the odds that somebody from Chelsea actually reads my blog?
Lol! what are the chances!
What % of docs can retire at 65 at their present lifestyle
Dentisys-3-5%
I definitely missed the memo on living like a resident (or more accurately willfully disobeyed that commandment). I’m coming to my senses, but a lot of the damage is already done in terms of the housing, geography, and educational choices for my kids.
Out of the remaining “big rocks”, I can see taxes, eating out, and vacations as big opportunities for saving. Don’t they say that reducing your taxes is like the easiest raise you can get? Gotta fill up those pre-tax retirement accounts!
Although I can’t promise to take my kids out of private school, at least their wild animal tendencies have made eating out and vacationing so unpleasant for the time being that we’ve been saving gobs of money in those areas!