[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.
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?
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?
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.
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
- 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!