[Editor's Note: The following guest post was submitted by recent residency graduate and regular reader, Dr. Kevin Nguyen, DO. As a new attending struggling to control increased spending, he stumbled across the term lifestyle creep. He decided something was amiss with his upward trend in spending and that he'd better get educated about finances. For someone new to finances, he learned the basics quickly and offers a timely warning to new graduates. We have no financial relationship. ]
Watch Out For the Creep!
After graduating from residency and starting my attending career, I found myself in unfamiliar territory. I’d spent the past three years as a family medicine resident focused on my education and learning about the practice of medicine. After I graduated and entered the real world, I felt somewhat lost. I am technically proficient as a physician, but if you asked me about managing finances, you’d have gotten a shrug and blank stare.
Recently, however, I’ve begun to look up resources on financial savings and wealth for retirement. It was through this research that led me to the topic of this article. I noticed that with my new income I was more comfortable spending money I would normally not have. I ate out at fancier restaurants, bought more material goods, and overall spent more money. In my efforts to reign this in, I came upon the term “lifestyle creep” and how it can affect all physicians that are new to the workforce.
What is Lifestyle Creep?
Explained further, lifestyle creep is the slow but steady changes in a person's spending habits and standard of living. Just received a raise? Go buy a new pair of shoes. Year-end bonus? Go put money down for that car. Graduate from residency? Go buy a new house, new clothes, and finally start living. Certainly, it’s not wrong to want to do these things, but lifestyle creep can damage your long-term financial goals and should make anyone suspicious of their spending habits.
The danger of lifestyle creep is that it often goes unnoticed. You may start off by rationalizing small purchases. By themselves, it may seem like nominal increases to your standard of living, but together, this can add up dramatically and slowly your lifestyle has changed. A higher lifestyle brings higher expenses, and failure to address this can lead to lost opportunities on saving and investing in your future. This can have a profound effect on when and how you will retire. We have all heard about the physician with multiple houses and multiple cars. Although we may envy the lifestyle, just know that to keep going at this pace the physician likely will have to work past retirement to pay for all the expenses.
Avoiding lifestyle creep is all about managing your expenses, being aware of change, and critically thinking about improvements in your life. Growing slowly into your new income is much better than jumping headfirst and making financial mistakes. To do this, we must understand the causes of lifestyle creep and why physicians are prone to it.
Lifestyle creep affects physicians because the transition between resident to attending career is often followed by a 3-fold increase in salary and disposable income. Paired with years of delayed gratification, and poor financial education, it is no surprise that lifestyle creep traps physicians into making financial mistakes and harming their retirement goals.
3 Traps of Lifestyle Creep and How to Avoid Them
#1 Sudden Increase In Income
The average resident in America makes $57,200. When compared to the average medical school debt of $190,000, you can see that it does not leave much room for leisure. Additionally, residents work 60-80 hours a week which often leads to a lower standard of living and lower expenses. However, this becomes more difficult after graduating. New physicians can make between $150-500K a year depending on specialty. If not controlled, this greater spending power comes with increased spending habits.
Case Report #1: I Deserve An Upgrade!
Dr. NS is a new internal medicine doctor who is now enjoying the attending life. His hobbies include traveling, and throughout residency, he used credit card points for trips around the world. This was a great way to save money and also still enjoy life. He is currently planning a vacation and feels he should upgrade to business class for the extra leg room. This would cost him an extra $2000, but hey, he’s making more money and can afford it. He rationalizes that he’s earned the ticket.
There is nothing wrong with the above scenario and Dr. NS has every reason to go for the business class ticket, however, this is an example of lifestyle creep. The next time he plans a vacation, he’ll reminisce about flying business and may opt to fly it again. He was used to one standard of living, but because he has more money, he slowly increased his standard of living. It will be harder for him to go back down to coach. That $2,000 can be better spent elsewhere.
How Will the “Upgrade” Affect Your Future?
Dr. Kevin Nguyen, DO
It is important to control your expenses and grow into your new income at a slow and steady pace. When looking at upgrading aspects of your lives, take time to consider how it will impact your future. Do you need to upgrade right away to a more lavish home or can you look to upgrade a smaller home in your current location? Although you can spend more with the new income, you will have other opportunities to spend money in financially smarter avenues.
Consider this metaphor: your income during residency is a small backyard pool. You have been swimming in this pool for many years and have gotten used to where you could go. Now, your swimming pool is much larger with a deep end and diving board. You wouldn’t want to venture too far off and drown before you are ready. First, you have to learn to swim and learn to control your new income to avoid drowning in a sea of debt.
#2 Instant Gratification
Instant gratification is a symbol of American culture in the 21st century. Whether it is purchasing the newest iPhone or adopting contemporary trends, Americans are always looking for their next fix. By choosing the time-honored career of becoming a physician, most, if not all, choose to have delayed gratification by going through the rigors of training. If lifestyle creep is a disease, then delayed gratification is one of the medications to manage it. It is important for all new physicians to continue delayed gratification in some fashion.
Case Report #2: Needs vs Wants
Dr. AP is a new doctor that joined a great practice in San Francisco. He always dreamed of living on the West Coast and is excited to start his new life. However, he also dreams of owning the new Tesla Model X. He drove his old Honda Civic during medical school and residency but now wants something new. After some debate, he decides to purchase his dream car. Now he’s able to drive to work with his “doctor car”, but he just incurred another expense.
Was this a necessary purchase or could Dr. AP have driven an older car to work and still be happy? The extra payments now going to his car could have been used for furthering his financial goals. Due to lifestyle creep and the need for instant gratification, he changed his standard of living.
How Will Instant Gratification Affect Your Future?
One way to avoid falling into the instant gratification trap is to compare needs versus wants. Do you need that new smartwatch or can you live with the older model? Can you delay these purchases and instead focus on financial savings? These are important questions to ask. Of course, it is prudent to enjoy your newfound success, but again, make sure to protect your future and not let lifestyle creep get to you. Doctors consistently fall victim to lifestyle creep and end up with more expenses than they should have. You do not want to retire with multiple mortgages and payments and no ability to pay them off. That means extra years working and not enjoying life.
Delaying Milestones
It is not only with material goods that delayed gratification should be practiced but also with gratifications of being an adult. The five milestones often touted for a successful adult are:
- Completing school
- Leaving home
- Marrying
- Having a child
- Becoming financially independent
By going through medical school and residency, these milestones are pushed back in life. Most graduates of residency can check off numbers 1 and 2. Some can say they also have checked off 3 or 4. However, the point is that if you can wait on some of the milestones and not rush into things, you will be better off. Don’t meet milestones for the sake of meeting them, but rather when it is economically feasible.
Don’t feel pressured when you see friends outside of medicine moving forward on these milestones and moving on with life. If you can save money living at home with your parents, do it. If you can delay having a child, that is a lot of financial savings. Instead of spending money right away, think about where else that dollar could go and gain value. Of course, this needs to be tailored for every person but the advice remains, don’t rush into things until you consider all the financial responsibilities.
The opposite is true for milestone #5 as you should pay off all your debts and save for retirement. We should hasten our visit to this milestone.
#3 Financial Illiteracy
Of the countless hours it takes to become a physician, almost no time is spent on financial literacy and financial education. Newly minted physicians enter the world with six-figure salaries and no understanding of how money works. With a disposable income, lifestyle creep inherently takes control of your life. This is why learning how to budget is a necessary but learned skill in avoiding lifestyle creep.
Case Report #3: Not Taking Advantage of Tax-Deferred Retirement Accounts
Dr. KN is a new family medicine physician. During residency, he made the smart choice of opting into his employer’s 401K match, however, he did not invest in any other opportunities available to him, like the Roth IRA. His rationale at the time was that he could not afford to spend the extra $5500 a year to max out this account. After looking at his retirement accounts, he realizes that he has not met his financial goals and has to catch up.
Although the employer match helped him build a 401K retirement account of $20,000, he contributed nothing additional to his IRA account. If he had contributed $5500 every year for his three years spent in residency, he most likely would have doubled his funds.
Doctors Need to Budget Too
There are several methods to budgeting. Personally, I’ve had success with allocating a purpose for every dollar. This helped me minimize unwanted spending and see where money flows. In practice, it can look like this:
At the beginning of every month, sit down and allocate your take-home income for that month. For example, if your residency salary paid you $3000/month, you would allot each dollar into specific purposes.
A Typical Resident Allocation:
$ 1300 to rent and electricity
$ 300 to groceries
$ 300 to eating and going out
$ 200 to car payments
$ 100 to student loan payments (consolidated with a physician plan)
$ 100 to transportation
$ 100 to internet and cell phone plan
$ 50 to online streaming websites
$ 250 to savings and retirement
$ 100 to disability insurance
$ 200 for incidentals
Doing this monthly will help you adjust and see where you can save. By allocating every dollar, you make it harder to overspend in different areas and avoid traveling further into debt. Budgeting also allows you to see how you spend money. If you notice that prior month’s outgoing expenditures increased, you should consider decreasing your expenses the following month to compensate. Budgeting is a simple game of checks and balances.
Budgeting for Savings, Retirement, and Student Debt
Putting money towards savings, retirement accounts, and your student debt is an important part of becoming financially independent. Remember, as physicians you start off making money at a later age compared to the general public. It would be wise to have at least 3 months in savings that is easily accessible, like a high-interest savings account. Attempt to max out contributions to your retirement accounts (401k/IRA) so that you can meet your retirement goals.
Any extra money put into your student debt is guaranteed return of whatever your interest rate is. If your student loan interest rate is 7%, any dollar paid off is a 7% return on investment risk-free. That dollar is one less dollar for which the bank can charge you 7%. As a comparison, most high-interest savings account from banks give you around 2-3% interest, while your retirement accounts can average about 7% historically. Depending on the market, your retirement accounts have risk and can go up and down, so it is not 100% guaranteed. When paying off your student loans, you will always get back your interest rate.
Conquer the Creep!
In summary, lifestyle creep is a slow but steady change in your standard of living which can lead to runaway expenses, failure to save for your financial future, and cost you money. As physicians, we are at risk because of our newfound income when we transition from resident life to attending. Lifestyle creep worsens from our need for instant gratification and our lack of financial education. It is important to reward ourselves, but make sure to do so without jeopardizing our future. Learning to grow into our income, continue to practice delayed gratification, and budget correctly by choosing smart financial decisions can help us avoid lifestyle creep.
What consequences have you paid because of failure to control lifestyle creep? What have you done to combat it? What advice do you have for physicians who bought into too much house, car, and inflated spending habits? Comment below!
Limiting lifestyle creep is really important after training. I do think there is a balance where people should reward themselves for a job well done when they finish, but it should be with reason. I recommend utilizing The 10% Rule that I teach on my blog (taking 10% of the increase in your post-tax pay after training and enjoying it; while using the other 90% to pay down debt and get on the right financial footing).
Thanks for the good reminder! You can never hear “true things” enough.
TPP
When I finished residency, I continued to live in the same condo and overall didn’t change my expenses much with the goal of paying off my student loans in a few years. The one thing I did allow myself was to get a new (Ford) SUV. It fit in my budget while still accomplishing my other financial goals. I paid off my student loans and the SUV before trading up from the condo to a beautiful house with a pool. I still put about $100k per year towards retirement and put extra money towards my mortgage each month. But fighting lifestyle creep is an ongoing battle. I think making saving and investing automatic is key. Seeing money pile up in your checking account can be very tempting.
Dr. Nguyen does an excellent job describing the issue in his article. One point that I did not read is the amplification effects of monthly spending when planning for financial independence (FI). As we run calculations for emergency savings account, disability insurance, life insurance, and target savings needed to reach FI, we base all of these calculations on monthly spending, not income. Therefore, if your monthly housing/auto costs increase by, let’s say $3K, then you should have an additional $9K-$18K tied up in your emergency account, you’ll require much more disability & life insurance to maintain the same lifestyle (also adding to your monthly spending), and your FI number (25x annual spending) will increase by at least $900K. Additionally, as you own more expensive houses & autos, the maintenance costs also generally increase. So when planning for the long-term, lifestyle creep adds a significant drag on your progress toward FI, and moves the finish line much further down the road.
For sure. Early FI requires a lot to be sacrificed.
yeah like sacrificing stupid decisions…..work hard and save->to invest year after year…no fancy car..mind your debt and what you’re paying for ut etc etc…but not buying a fancy car is far from a sacrifice
Justsayin
Great an important topic.
I think we all need more research and writing on this.
Personally, I don’t think we can “avoid it.” At least I haven’t. No one I know has. But you can learn to anticipate it, minimize it, and manage it.
I used to think 100K salary or 500K in investments was great. Now I don’t. I looked forward to becoming a millionaire one day. After achieving that, I realized 40K a year isn’t much. I set “my number” at 1.5M then 2M then 2.5M then 3M. See a trend?
My general current recommendation for doctors (if they require a simple one “number” fits all solution) is to get themselves $5M before they chill too much. Check in with me in a few years though. My Number will likely be higher.
I’ve experienced the same. Not only is my number rising, but so is my spending. Luckily so far my income and investments have more than kept pace.
I took the live like a resident and ingrained it into myself for at least 5 years… currently in year 3. What i did was i took the salary i made as a resident which was roughly 3000/mo and set that as my attending budget per month which was already about 500-700 more than i spent as a resident so that felt like an “award”.
I was able to work tons of moonlight shifts during residency and pay off my loans prior to graduating.
The only downside to the 500-700 increase in budget is about 300 of that goes into health insurance and about half my patients drive better cars than i do. However, I am on track to be able to “retire” in less than 10 years due to my lifestyle at which point i will buy with cash the 100% automated tesla in 2030.
Out of curiosity, how much moonlighting did you do to pay off all your loans? I’m just starting residency this year going into a specialty that is very conducive to moonlighting. My program also has great in-house opportunities. I’m trying to figure out how close I can come to paying down my loans in residency.
While it can be done, you should ask yourself if it should be done. Residency by itself is hard enough. Adding on another job is difficult. Working enough at that job to pay off your student loans during residency is pretty extreme. I worry that too much focus on that task will take away from your primary tasks- becoming a good doc and ensuring career longevity (i.e. avoiding burnout).
This is a great post, and an overall message that can’t be overemphasized.
I do have one quibble, though. I don’t think having kids, if you are at the right place in your relationship, should be deferred based on economic milestones and do not think it belongs in the same delayed gratification list and discussion as Tesla purchase because it is much more nuanced.
Certainly, kids are expensive. However, delaying this milestone if you are otherwise ready can dramatically increase the cost. There is some data that suggests higher rates of infertility in women in medicine compared the general population and certainly as your age goes up rates of infertility go up. IVF can be expensive – tens of thousands of dollars – and infertility places strain on marriage. Divorce is one of the biggest financial catastrophes that can befall physicians, so minimizing strain where possible makes sense. In addition, the cost of taking time off later in your career can be higher. In training, for instance, maternity leave is short and often inadequate but also frequently paid and even if unpaid, your time and sacrificed earnings are much less valuable than they are later. In some private practices, you would forgo earnings and maybe even need to continue to contribute to overhead depending on how progressive your group is or isn’t. (For instance, a woman making 300,000 who takes off 3-6 months maternity leave could be forgoing 75,000-150,000 even if partners cover overhead). You may also feel pressure to defer pregnancy even further to show your commitment to the job, which then increases the risk of (potentially devastating) cost of infertility and associated marital strain. These costs make missing out on extra retirement contributions during training to pay for daycare seem like a bargain.
IvyMD, this comment hits close to home. The topic of planning for children doesn’t get enough airspace in the financial independence discussion. It’s tricky because as you note, fertility can’t be decoupled from biological age in the same way as various other milestones.
A “forever house” and luxury car can certainly be pushed off indefinitely, but fertility fades with time, and fades fast!
The Darwinian Dr-ess (aka wife) and I struggled with this decision mightily as we both pursued professional careers and the realities of my surgical residency.
Thanks for bringing up this important point.
— TDD
Thanks TDD – and can I say the Darwinian Dr-ess is an amazing title!!!! Good luck as you work through your decision there.
I agree with the kids issue. My wife and I (both still in residency) talked to numerous docs – attendings and residents – that have had kids, and the two most common responses to the kids question were “there will never be a good time to have kids so just do it when you’re otherwise emotionally ready” and “I wish I did it during residency”.
This is Kevin, the author of the guest post. Just wanted to say I completely agree with your point and wanted to clarify the children part. Those “milestones” above shouldn’t be met just for the sake of meeting them. After getting married, my wife and I had pressures from our respective families to have a kid right away. The decision to have a child should be based on the prospective parent’s circumstances, whatever they may be.
There is never a good time, but there are, for sure, bad times. The decision should fall on your respective circumstance and not on any preconceived society notion.
Thanks, Kevin, and I loved your post. Great point that external pressures can go both ways.
It’s a complicated issue, but we can sometimes go too far in delaying kids to that perfect time when we have everything together without recognizing the cost or that challenges will still be there when we reach that point when we imagine our lives will be easier with the attending job/income/making partner or whatever next goal we are aiming for. I’ve seen close friends really struggle with this problem, and I think it deserves a place in the discussion.
$100 for monthly loan repayment!? My payments are over $250, how did you get yours so low?
IDR payments can be as low as zero. Refinanced loans in residency with SoFi or Laurel Road come with a $100/month payment.
As a current single resident making ~60k and going for PSLF, I pay about $250 a month too. Cant get around it unless I put more money in a pre-tax account or refinance. =0(
Or get married or have a kid. 🙂
It is great the author of this guest post realized this fairly early on before lifestyle creep really has a chance to sink in. That in itself is showing that the word of WCI is spreading as this information was unheard of when I graduated medical school in 97 and residency in 2002.
I feel for lifestyle creep hook line and sinker, buying a new Mercedes C320 in the last month of my IR fellowship. Already bought the house in residency as well. I justified it all because I figured I would make a lot more money later so why not enjoy some now. It’s a dangerous line of thinking.
Nice post! This comes at the right time for a newly graduate, congrats! I am very frugal, and one reason that makes me think that way is a concept of “compound interest”. The poor work for money while the rich have the money work for them. If you invest $1000 in s&p 500 when you are 30, which grows at 10% a year, and keep it until you are 80, then that $1000 will be ~$120,000 without you having to see a single patient. At 80, you probably will not be able to see patients even if you want to. Spending that $1000 today just takes away a lot of money from the old you. Do you want to work hard now, or when you are 80?
Hi. The 50 year example sounds great but do realize 50 years of inflation would make the final amount of money MUCH MUCH less. Inflation adjusted roughly your 120k would be having the purchase power of 10-12 k in today’s dollars. Still you made 10x which isn’t shaddy at all.
Good writing and on point.
I personally think we were frugal enough and wise to prioritize paying student loans. But the event of having twins and the expenses raising them definitely rocks our tiny boat. I give in to the creep intermittently, but I know I cannot be too complacent because I feel the pinch every paycheck.
At the end of the day I think of it as a balance that I need to achieve. Sure, money is tight but it’s all worth it seeing my kids fluffy and happy.
All the best!
Ricky Baby
I agree with Ivy MD – delaying getting married and having children, if you’re ready for them, does not make any sense. I’m pretty sure I spent less money on my wedding because as a PhD student, I had no money but was able to DIY a bunch. The same wedding after training would have meant a wedding planner and fancier reception “because I’m busy and I can afford it.”
Similarly with kids, even notwithstanding the money that IVF could cost if we decided to delay, being on a limited budget during residency means spending a lot less on them out of necessity. I buy everything secondhand. We don’t do big parties. And honestly, we’re too busy to feel like we’re missing out!
So basically what I’m saying is that having kids before lifestyle creep kicks in sets you up with a better baseline for spending on kids!