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Living Paycheck to Paycheck on $300K

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  • The White Coat Investor The White Coat Investor 
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    Status: Physician
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    Joined: 05/13/2011

    I received this question privately on QuantiaMD and removed identifying details. I already gave the doc a response (see below) but I thought it would be helpful for him to hear from other forum members on the same issue. Remember this is a real person who is really reading this, so be kind even if you have to give tough advice. While it seems lots of forum members have their financial act together, this sort of question is not unusual at all in my email box or from people at conferences I speak at.

    I’m a doc with a salary around 300K, I have about 400K in student loans. I’m paying about 3500 per month. I have a lot of other expenses-kids’ tuition, car payments, life and disability insurance, kids college fund. So pretty much living paycheck to paycheck. Can you recommend what to do financially?

    Here was my response:

    I’m not sure there is any nice way to say this, but it is ridiculous for any American to be living paycheck to paycheck on a $300K salary. Common among docs? Absolutely. But still ridiculous. You grew into your income way too fast and before even paying off your loans. You win the spending/saving battle with the big items- housing, transportation, educational costs etc, not the lattes. So if you want to get serious about fixing your financial situation, that is the place to start.

    I typically recommend docs live a lifestyle similar to that of a resident for 2-5 years after residency, at least until the student loans are gone. In your case, that means living on $50K a year, paying perhaps $100K in taxes, and throwing $150K a year at those loans. At that rate, the loans are gone in about 3 years. At that point, you can increase your lifestyle quite a bit, making sure to carve out at least 20% of your gross salary to put toward retirement.

    But it is a lot harder to not grow into your income than it is to cut back your lifestyle. For example, if all you had were $50K in gross income, you likely would be living in a different house, driving a different car, and the kids would be in public schools, no?The other alternative for student loan management, of course, is PSLF, but you have to be employed by a 501(c)3 and you had to make a bunch of tiny payments under the IBR or PAYE program in residency for it to work out. So that might mean a job change.

    There is no easy fix here. Spend some time on The White Coat Investor blog and forum and you’ll meet a lot of people who can help you learn more and provide motivation to do what needs to be done if you’re serious about fixing your finances.

    What would you say to this doc?

    Site/Forum Owner, Emergency Physician, Blogger, and author of The White Coat Investor: A Doctor's Guide to Personal Finance and Investing
    Helping Those Who Wear The White Coat Get A "Fair Shake" on Wall Street since 2011

    #20999 Reply
    PhysicianOnFIRE PhysicianOnFIRE 
    Moderator
    Status: Physician
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    Joined: 01/08/2016

    Excellent response. I would imagine you could copy and paste it to answer a lot of similar questions.

    I’m a firm believer in relative frugality. Our household spends more than our neighbors, but much less than the “typical” physician. It’s true that it’s more difficult to unwind a lifestyle of consumption than it is to delay or avoid it entirely.

    I would recommend putting the kids’ college funds on hold until the student loans have been retired. Or, if it’s a reasonable option, give the public schools a go and put what would have been paid in tuition into the college funds. Cars can be traded in. Houses can be downsized (move to an area with good public schools if there is such a place). None of it will be easy, but those are the changes that will have to be made to get off the treadmill.

    The alternative is to try to increase income without increasing expenses, which can also have a dramatic effect.

    Best,

    -PoF

    40-something anesthesiologist and personal finance blogger @ https://physicianonfire.com [Part of the WCI Network] Find me on Twitter: @physicianonfire

    FIRE. Financial Independence. Retire Early.

    #21000 Reply
    Avatar gebbils 
    Participant
    Status: Physician
    Posts: 1
    Joined: 05/31/2016

    Excellent response. I would imagine you could copy and paste it to answer a lot of similar questions.

    I’m a firm believer in relative frugality. Our household spends more than our neighbors, but much less than the “typical” physician. It’s true that it’s more difficult to unwind a lifestyle of consumption than it is to delay or avoid it entirely.

    I would recommend putting the kids’ college funds on hold until the student loans have been retired. Or, if it’s a reasonable option, give the public schools a go and put what would have been paid in tuition into the college funds. Cars can be traded in. Houses can be downsized (move to an area with good public schools if there is such a place). None of it will be easy, but those are the changes that will have to be made to get off the treadmill.

    The alternative is to try to increase income without increasing expenses, which can also have a dramatic effect.

    Best,

    -PoF

    Click to expand…

    what are some of the ways to increase income?

    #21019 Reply
    Avatar YYjames 
    Participant
    Status: Physician
    Posts: 133
    Joined: 01/26/2016

    Increase income.

    Cutting back lifestyle blows.

    Living like a resident for aggregate 10 years (longer for surgical residencies)? Possible. But unpleasant.

    So essentially you’ll “enjoy” fruits of labor at what after 40 years? I see OA in knees by then.

    #21020 Reply
    PhysicianOnFIRE PhysicianOnFIRE 
    Moderator
    Status: Physician
    Posts: 1543
    Joined: 01/08/2016

    Excellent response. I would imagine you could copy and paste it to answer a lot of similar questions.

    I’m a firm believer in relative frugality. Our household spends more than our neighbors, but much less than the “typical” physician. It’s true that it’s more difficult to unwind a lifestyle of consumption than it is to delay or avoid it entirely.

    I would recommend putting the kids’ college funds on hold until the student loans have been retired. Or, if it’s a reasonable option, give the public schools a go and put what would have been paid in tuition into the college funds. Cars can be traded in. Houses can be downsized (move to an area with good public schools if there is such a place). None of it will be easy, but those are the changes that will have to be made to get off the treadmill.

    The alternative is to try to increase income without increasing expenses, which can also have a dramatic effect.

    Best,

    -PoF

    Click to expand…

    what are some of the ways to increase income?

    Click to expand…

    In the link, the physician switched from academic to private practice. Other ways: locums tenens work, insurance reviews, real estate, a better job, longer hours, entrepreneurial endeavors, etc…

    My group was recently able to negotiate about a 12% production-based raise when we had the data to show we were generating above average revenue for the hospital.

    40-something anesthesiologist and personal finance blogger @ https://physicianonfire.com [Part of the WCI Network] Find me on Twitter: @physicianonfire

    FIRE. Financial Independence. Retire Early.

    #21021 Reply
    jfoxcpacfp jfoxcpacfp 
    Moderator
    Status: Financial Advisor, Accountant, Small Business Owner
    Posts: 8342
    Joined: 01/09/2016
    But it is a lot harder to not grow into your income than it is to cut back your lifestyle.

    Click to expand…

    Did you mean to say “easier” or is it really easier to cut back your lifestyle? I thought you gave a great answer, just confused about what you meant here.

    In response to the doc –

    • Agree with PoF to stop funding 529s until out of debt.
    • If you have whole life, cancel the policies and change to term.
    • Get a second opinion on disability insurance from Larry Keller.
    • Put the kids in public school or charter school.
    • Spouse can get a FT or PT job.

    Johanna Fox Turner, CPA, CFP: I am not your financial advisor; any responses are for general purposes only
    http://www.fox-cpas.com/for-doctors-only ~ [email protected]

    #21026 Reply
    The White Coat Investor The White Coat Investor 
    Keymaster
    Status: Physician
    Posts: 4601
    Joined: 05/13/2011

    There you go reading what I wrote instead of what I meant again.

    Site/Forum Owner, Emergency Physician, Blogger, and author of The White Coat Investor: A Doctor's Guide to Personal Finance and Investing
    Helping Those Who Wear The White Coat Get A "Fair Shake" on Wall Street since 2011

    #21028 Reply
    LBKCLU LBKCLU 
    Moderator
    Status: Website Sponsor, Insurance Agent
    Posts: 261
    Joined: 01/08/2016

    If you are not going for or don’t qualify for Public Service Loan Forgiveness (PSLF), the first thing I would do is consider refinancing your student loans if the interest rate(s) are high. This would allow you to reduce your payment or keep the same payment and get out of debt sooner. If you live in an area that First Republic Bank serves, this would be the first one to check out. Make sure to email Cindy ([email protected]) to get a referral and qualify for any bonus that WCI has negotiated for his readers.

    If you own your home and have a mortgage, have you considered refinancing it to lower your interest rate and payment?

    Do you own or lease your car? If it is a lease and the car is expensive, consider getting a less expensive car?

    While the small items can add up, I would focus on your large expenses first in order to free up some monies to allow you to reduce your debt.

     

    Lawrence B. Keller CFP®, CLU®, ChFC®, RHU®, LUTCF
    http://www.physicianfinancialservices.com I (800) 481-6447

    #21029 Reply
    Avatar canadianoutlaw 
    Moderator
    Status: Resident
    Posts: 160
    Joined: 01/10/2016

    Increasing income is sort of missing the forest for the trees. This would likely end up being a temporizing measure only. As everyone has suggested, at its core, the issue is of behavior, not income.

    #21035 Reply
    Avatar jhwkr542 
    Participant
    Status: Physician
    Posts: 1330
    Joined: 02/15/2016

    I think the most important step for people like this is just the basics. Where is the money going? Track your spending for a month or two and figure out what can be cut easiest. Sometimes, I doubt people know where all the money even went. If they’re eating out a lot, having a food budget may save a few hundred a month. Do they hire people to do the yardwork? Housecleaning? Wash the car? All this can be done easiest if you see where every dollar went. Using mint or other like programs will help. The original question writer is the only one to know the details.

    #21039 Reply
    Avatar Xeno 
    Participant
    Status: Physician
    Posts: 128
    Joined: 01/24/2016

    Here’s a vote for YNAB https://www.whitecoatinvestor.com/you-need-a-budget-a-review/. Clearly a person can live on a fraction of $300K/yr, but only with either very modest spending habits or a very conscious effort to put your money to work for you and track each dollar. YNAB is a way to make yourself and your household aware of where the money is going and then make choices about what your financial goals and priorities are. I’m guessing this person has a very vague sense of what their salary should be able to purchase and simply checks checking account balance prior to making purchases, rather than having a proactive plan of what each dollar’s job is.

    #21042 Reply
    jfoxcpacfp jfoxcpacfp 
    Moderator
    Status: Financial Advisor, Accountant, Small Business Owner
    Posts: 8342
    Joined: 01/09/2016

    I think the most important step for people like this is just the basics. Where is the money going? Track your spending for a month or two and figure out what can be cut easiest. Sometimes, I doubt people know where all the money even went. If they’re eating out a lot, having a food budget may save a few hundred a month. Do they hire people to do the yardwork? Housecleaning? Wash the car? All this can be done easiest if you see where every dollar went. Using mint or other like programs will help. The original question writer is the only one to know the details.

    Click to expand…

    This is a very good point and the most important step to take before trying any of the other suggestions above, mine included. Just for the record, “Sometimes” is actually “Almost all the time”. My guess is not so for the regulars on the forum but there are multiples more who lurk and are just now learning a lot of this stuff.

    Johanna Fox Turner, CPA, CFP: I am not your financial advisor; any responses are for general purposes only
    http://www.fox-cpas.com/for-doctors-only ~ [email protected]

    #21052 Reply
    hatton1 hatton1 
    Participant
    Status: Physician
    Posts: 3123
    Joined: 01/11/2016
    Splash Refinancing Bonus

    Agreed this doc has made mistakes but realizes he/she has a problem.  I agree the income side is not the problem.  Of course to really comment it would be nice to know the docs age and more general details.  I think going with whatever car that he/she can afford to buy outright is a good step.  Public schools etc.  A real financial plan or some intense personal finance reading also. Holes can be dug out if you give him/her a shovel.

    #21055 Reply
    Vagabond MD Vagabond MD 
    Participant
    Status: Physician
    Posts: 3486
    Joined: 01/21/2016

    Coming out of fellowship and immediately reading, “The Millionaire Next Door,” was formative in developing my financial habits early in my career. That, and joining a group that was not focused on the trappings of physician income wealth–fancy cars, country clubs and the like. I made some mistakes early, but nothing critical, and with no debt and a high income, the repercussions were quickly mitigated.

    I think that some of you are a bit hard on the physician described in the OP. The promise of a medical career and the delayed gratification sets one up to come out of residency ready for the “good life”. The favorable financial trajectory of the previous generation of docs, with de minimis college and medical school tuition and enormous incomes has been replaced by a huge cost of entry to a career that pays most an upper middle class wage for a lot of work and responsibility. The cost/value ratio of the medical career has certainly been flipped on its head, and I doubt that medical schools and residencies are educating their students on how to best survive the new era.

    #21072 Reply
    Avatar AlexxT 
    Participant
    Status: Physician
    Posts: 897
    Joined: 01/13/2016

    Without knowing all the details of how far out of practice this physician is, how many children, etc, it’s hard to make definitive recommendations.

    However, I estimate that he has an after tax income of about 16,500 to 18,500 a month.  I think that expenses of about 10,000 a month are reasonable.  Certainly, quite a few people have posted that that’s their monthly budget. While most American families live on 50 k a year,  10 k would not be profligate for a physician who could afford it.  Add the 3500 monthly payments for loans and private school tuition ( which in my expensive area range from 12k to 25k for kindergarten up to as much as 47k per year per child for high school ) and that salary would indeed be used up by the end of the month.   Obviously something has to change.  He does need to look at his spending, item by item, but as several others have also said, I wouldn’t assume that he’s doing anything egregious.  I would look hard at the private school tuition, but in many areas, or for some children, private schools are a necessity and not a luxury.

    #21092 Reply
    Liked by Vagabond MD

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