[Editor's Note: The following post originally appeared on WCI Network partner site, Physician on FIRE. I'm fully behind the “live on half” challenge and encourage you to share your own stories of “living on half” with the WCI community via the WCI Facebook Group, Forum, and on Twitter at #liveonhalf. A community pulling for each other can often mean the difference between success and failure in reaching a difficult goal. Thanks for all you do to help each other!]
It’s not a suggestion or a recommendation. It’s a challenge. If you can find a way to meet this challenge, you will be rewarded handsomely.
How so? Living on half of your take-home pay, or to put it another way, saving and investing as much as you spend, should lead to financial independence (FI) in roughly 15 to 20 years.
Work becomes optional.
You can live the rest of your life on your own terms. That’s a reward that I feel makes certain sacrifices well worth it.
What kind of a sacrifice are we talking about? I’m so glad I asked! Altering the hypothetical physician’s budgets from a previous post on specialty choice, we can derive an annual spending budget for each of these four physicians with household incomes of $200,000, $300,000, $400,000, and $500,000 by giving them a 50% net savings rate. [Calculate your savings rate here]
With a 50% net savings rate, representing 35% to 40% gross savings rates, these physicians are indeed financially independent in 14 to 19 years with a realistic range of real (inflation-adjusted returns from 2% to 6%.On the lowest end of the spectrum, our physician families were spending $79,000 a year on a $200,000 salary, requiring just under $2 million to be financially independent, with 25 years of expenses saved after 14 to 18 years.
The biggest income producers were able to spend $171,900 every year and would have their coveted FI status of $4.3 million in approximately 15 to 19 years.
The 7 to 12-month discrepancy can be explained by the fact the $10,000 529 contributions, which do not count towards retirement savings, become relatively smaller on a percentage basis as income increases, allowing slightly more spending as a percentage of take-home pay. I don’t want you to miss the forest for the trees, but I thought that was a point worth mentioning. I know my astute readers would call me out in the comments; it wouldn’t be the first time.
What other assumptions have I made? Besides the dumb one about my 401(k) vesting schedule? In order to make tax and net worth calculations, we must start with assumptions.
Each of these physicians is married with two children, filing jointly. We start keeping track when they have a net worth of zero, which is very likely at least a couple years after residency for most. They live in a middle-of-the road income tax state, and the stated income is total household income.
The Live On Half Challenge for Physicians
I frequently refer to the benefits of being FI, and all of them can be yours if you accept the challenge and earn a solid living for fewer than two decades.
All you have to do is live with a budget of 60% to 340% more than the average American household, which spends about $50,000 a year. With an extra $29,000 to $120,000 to spend every year, you should be able to manage. You got through residency without spending more than $79,000 a year, didn’t you? I certainly hope so!
Our family of four manages to live quite well over the last year on less than $79,000. If we had a mortgage, our budget might have looked more like that of Dr. B. That’s OK. My in-demand specialty, along with a little geographic arbitrage makes me a Dr. C in terms of earning power. We also get much of our travel for next to nothing using clever travel rewards strategies.
I’ve written about what it means to be a frugal physician, which is what you will need to be if you are a Dr. A with a household income of $200,000. To keep your budget in check, focus on the big stuff. Your home. Your cars. Private schools. Second homes. Second wives.
If you’re a Dr. C or Dr. D, you’ve got $142,000 or $172,000 to spend each year. If you can’t figure out how to live on that measly sum, I’m afraid I can’t help you.
pickpockets. must be the problem.
What About My Debt?
I’ll do you a solid. I called it the “Live on Half” challenge, not the “Save Half” challenge for a reason. You can spend half your paychecks, and we won’t count debt payments as spending. As long as the other half of that check is being used to retire debts, it’s being put to good use.
Consequentially, it might take you a bit longer to hit your FI target compared to the four featured physicians, but their stories started with a zero net worth. If you’re in the red, you’ll need a little time to dig out. That’s fine; take as much time as you need. As long as you’re Living on Half.
Are you living on half of your income? Has it been difficult to do? What are some things you have done to make it easier to accomplish? Comment below!
I’ve been playing catch-up since age 45. From 30 to 45 we spent too much.
Big money decisions: had 4 children, chose private school, built a big house in a non-growth area, did not save enough for college.
I’m making more (side gig), spending less, and maxing retirement accounts. It’s working. Too bad I didn’t have the FIRE goal at 30 or even at 40.
http://google.com
The best thing about the live on Half challenge is that you get acclimated to that lifestyle and do not undergo lifestyle inflation.
For every dollar you don’t spend, you technically can get away with $25 less needed for your nest egg.
If you are able to cut down your spending by $100k/yr, that is $2.5 million less you need in retirement. Studies have shown that the happiness factor typically maxes out at a certain income level (around $90k) and that money above that, despite what you would think, really doesn’t bring that much more happiness.
So if we can get maximum happiness at even $100k/yr, most physicians can easily swing that as an annual spending cap and then direct anything over that to knock down debt and turbocharged retirement/college savings.
Not technically true. While the happiness slope dramatically changes somewhere between $75K and $110K, the slope is still positive above that.
Well it isn’t technically false, is it? WCI blog so WCI gets the final word. Nevertheless, a lot of the work by Ed Diener and the studies at Princeton and Purdue would support Xryvsn’s statement. I wasn’t able to paste a graph here unfortunately but these are some quotes.
“A large analysis published in the journal Nature Human Behavior used data from the Gallup World Poll, a survey of more than 1.7 million people from 164 countries, to put a price on optimal emotional well-being: between $60,000 and $75,000 a year. That aligns with past research on the topic, which found that people are happiest when they make about $75,000 a year.”
“The researchers, from Purdue University, also found that it may be possible to make too much money, as far as happiness is concerned. They observed declines in emotional well-being and life satisfaction after the $95,000 mark, perhaps because being wealthy — past the point required for daily comfort and purchasing power, at least — can lead to unhealthy social comparisons and unfulfilling material pursuits.”
“That’s the conclusion of a recent study that found $105,000 to be the ideal income for life satisfaction in Northern America. Earnings past that point tended to coincide with a lower levels of happiness and well-being, researchers found.”
“That point for life satisfaction varies around the world, researchers found, from $35,000 in the Caribbean to $125,000 in New Zealand. Past that, lead author Andrew T. Jebb said, “there’s a certain point where money seems to bring no more benefits to well-being in terms of both feelings and your evaluation.”
I think the data looks a bit more like this graph: https://sampriestley.com/happiness/
and that’s been my personal experience too.
This one suggests that globally, that number isn’t $75K, but $161K, and that it varies a lot by country.
https://www.cnbc.com/id/50027184
These guys say $95K.
https://www.marketwatch.com/story/this-is-exactly-how-much-money-you-need-to-be-truly-happy-earning-more-wont-help-2018-02-14
How about this one? See any flattening there yet? I don’t, happiness still increasing at the top of the chart.
https://ourworldindata.org/wp-content/uploads/2017/04/Happiness-by-Income-Quintiles-Small-Multiples.png
Here’s another:
https://www.cedu.niu.edu/~walker/statistics/K-12%20Simple%20Linear%20Regression.pdf
Their conclusion?
I think that’s probably the truth of the matter. If you’ve got to err, I think you’re better off erring on the side of a little too much income, whether the magic number is $75K, or $161K, or $500K.
The problem with a lot of these studies is that they’re purely correlational. What do we learn from statistics 101? Correlation does not equal causation, and the authors state this precisely.
“So what do you think? Is the secret to happiness: not having kids, earning $75k dollars, sleeping 9 hours a night, going to church every week, living at your office and being over 75 years old?
Well, I’m pretty sure that’s not it. Let’s be careful not to assume that correlation implies causation.”
There are so many potentially confounding variables (e.g. perhaps those with higher incomes tend to have more fulfilling work, perhaps they live in better areas that lead to happiness, or maybe happier people tend to earn higher incomes as an effect rather than a cause) that it’s impossible to say with any certainty what the relationship between money and happiness actually is.
Agreed. Pretty tough thing to study with double blind placebo controlled trials, which makes the data worth a lot less.
This is one of my favorite all-time post!
I never had a fixed savings rate, but looking back it would have averaged about 38% of gross or 50% of net income. I started working in the medical career at age 31 and became financially independent at age 48. That is 17 years . It works.
At age 50 I definitely feel some of the accumulated fatigue and stress of a 20 year medical career. It has been wonderful that financial independence has allowed me multiple options to help me enjoy my career and my life better. I wholeheartedly encourage anyone and everyone to follow this approach.
As a certified Dr. A, I can vouch that being frugal and living on half is really not that bad. As far as happiness goes, knowing financial independence is 10-15 years away has definitely increased my happiness.
The Frugal Physician
Almost. 30% in taxes. 30% in savings. 40% on spending.
Couldn’t be doing this on student/resident paycheck (i.e. most Americans’ income). Must not forget that.
And for most of us, the percentages change over time. For instance, I think our %s look something like this this year: Spending 10%, Giving 15%, taxes, 32%, and saving 43%. So I guess we’re still saving more than half of net income. FI arrives quickly at that speed.
This is totally my mantra and totally totally when there are two earners! whenever someone asks how we accomplished what we did financially…this is it. we always lived off one income. The other essentially paid the tax burden and we stashed. We had money skimmed off every week that we dollar cost averaged into investments and extra to the mortgage…pay taxes, pay yourself, pay your bills and live off the rest. The problem is many people put “pay yourself” with whatever is left after their monthly spending……
We did this off combined dual physician income of 250K by the way…..you don’t need to crazy high income. Less than the table in this post (because there were two of us!)…….
We didn’t live on half, we lived on one income. Not to become FI but so we were not having to cut back when one of us chose (or, as it turned out, were forced- took me a year plus to be able to work in England), if we did, to stay home with kids. Important plan for dual docs/ dual high earners which might help out before retirement (though if it does, slows down FI).
A very useful exercise to complete. We’re a dual-physician couple from north of the border who recently moved into a big, doctor’s house (and embarrassed to report how big). We’re both fortunate to have high physician incomes, profited handsomely from the run-up in home prices in our region, no other debts and to have saved well over 50% of our gross income for our first 5 years in practice. Retirement and eliminating the mortgage each planned for 20 years from now.
While our tax situation is a bit more complicated (so this represents an overestimate to some degree as much of the saving is in partially tax-deferred accounts which reduces our average tax rate significantly) we’re presently continuing to save 63% and 54% each of net income and in the low 40% ranges for gross despite a massive increase in spending (all mortgage and associated costs related).
With interest rates rising on our mortgage it’s nice peace of mind to know we still have the option of scaling back work, taking an extra long maternity and the option of sending kids to private school or joining the local county club at least to the point at which our gross savings rate approaches the 20% range.
Envious of those relatively low tax rates.
Dividing our budget into savings, taxes and spending, we save more than we pay in taxes and pay more in taxes than we spend. We include charitable contributions in spending.
Although financial independence was a goal, this division worked out from being careful about spending and savings and keeping taxes as low as we can. We neither changed spending nor reduced working when we reached financial independence.
FI is a relative term that requires predicting future expenses, tax rates and market performance. At most one can have varying levels of confidence in the FI prediction.
Only the very wealthy, or those near death, can reliably predict no plausible scenario under which they run out of money.
I’m confused by the definition of take home pay. Why is it after pre-tax savings but before after-tax savings? Doesn’t that mean you’d have to lower your spending if you moved savings from after-tax to pre-tax?
Yeah I had some confusion with precisely what was going where too. For example, towards the end the remark about how debt payments “don’t count.” Well, my mortgage is a debt – does that mean that if I’m paying down a mortgage my house isn’t included as part of what I’m “living off” but if I’m renting it does? Or maybe it’s only pay-ahead payments that “don’t count,” which is more rigorous.
Of course, you could then say that it doesn’t matter that much, what matters is the general mindset of live frugally, but then why set up a benchmark like 50%?
In light of the flattening/slowing/whatever they’re doing happiness vs money curves above, would be interesting to see someone do an optimization problem and find at what % savings you achieve ideal happiness with the shortest time to financial independence for a given income level.
The vagueness is intentional. I don’t think it matters much if you’re saving 45% or 55% or precisely how you calculate it. If you’re anywhere in the vicinity, you’re doing great.
Regarding pre-tax, pre-check investments, you may not see it in the check (or direct deposit) as take-home pay, but you would if you weren’t making those investments. I do have a calculator that calculates net and gross savings rates. In those, the pre-tax investments goes in both the numerator and denominator. https://www.physicianonfire.com/calculators/savings-calculator/
Best,
-PoF
Seems like Mortgage, other student debt principal pay down, and 529 savings aren’t “spending” but they certainly aren’t “Retirement savings” either.
Maybe you need to rephrase that this is about spending <50% of your take home.
I am currently doing the live on less than half thing by a long shot, but my income has been atypical for a physician, meaning that it has fluctuated much more than normal. Due to a startup that I created, I am currently earning the highest income of my mature career by a large margin. We are living very large on a small percentage of our currently very high income, but the lifestyle bloat is giving me some angst. What happens if or when the music stops?
I’ve had the same fear about my income for the last 3-4 years as WCI, LLC has started making real money. I’ve kind of approached it just like when I started making “doctor money,” when I “lived like a resident.” When I started making WCI money, I kept “living like a doctor.” We cleared our debts, even the low interest ones. We tried to grow into it very slowly and never all at once. We were very deliberate every time we increased our lifestyle, making sure we could maintain that new level. We minimized fixed expenses but had plenty of splurges on the variable side. We give more away each year but we continue to save. I think this year we’ll be spending about 10%, giving about 15%, paying taxes with about 32%, and saving/investing the rest.
That is good advice. Our fixed expenses are probably around 6% of gross income but we are spending around 15% of income.
We own a lot of investment real estate and we paid off all of the associated debt. We have a very low interest rate mortgage on our primary home, something like 1.4% after taking the tax deduction into account, but nevertheless I am planning on paying that off over the next several months to simplify our life and reduce our fixed costs, more for the simple peace of mind of not having any outstanding debt rather than as a calculated optimal financial move.
I am working on finding financial peace of mind, looking for a focus of serenity as our passive real estate income will likely cover much of our expenses even if for some reason we don’t generate any other income in the future.
I’m an academic doctor and don’t earn as much as many here do (still well into six figures though, and the lifestyle can’t be beat), and I can still vouch that living on half your income is not only possible but it’s very freeing. Knowing that we could buy this or that but consciously choosing not to because we have decided that we value our freedom above those potential purchases is a special sort of freedom that is hard to explain but very real to us at least. Perhaps others have experienced this and can better explain it.
This is reassuring. Sometimes it seems like everyone on this site is saving 75% of their income. Between debt plus retirement we are close (47%) of our net income and trying to do better. We are guilty of buying a house recently just after finishing training (but we are counting that on the spending side) which makes raising the percent higher a bit hard, but our income will go up over the next couple years, bringing our house from less than 2x my annual income to less than 1.5x.
I think it’s important that we remember that it isn’t wrong to spend. The whole point of saving and investing is to spend MORE later and to have more choices in life. Certainly a 2X home is nothing to feel any guilt about, especially with a 47% net savings rate.
We are living on half… of gross income. Saving about 25% this year (of gross), with about that much if not more to taxes.
I kept coming back to this post and had to re-run numbers since my financial situation changed a lot in the past year. I looked at my monthly expenses and if you take out all the one-time big purchases I’ve been making in the past year (home renovations, buying furniture, replacing appliances, roof, putting on solar panels, etc), I was happy to see I actually live on about a third of my income! So once I wrap up all these home projects (famous last words right?) then I should be well on my way. Glad to be reassured I didn’t overdo it with my 2.4X house.
sorry, guess I’m the only person who can’t figure this out and/or I’m a little tired half-way through the week and I’m missing something, but I see you have an asterisks by “all contributions”, but I don’t see where that asterisks got defined and I’m coming up $10k short when I add the numbers you have identified as contributions (I think pre and post-tax investments) for each of these four scenarios.
Also, I can recreate how you got the percentages for gross savings (all contributions/compensation). However, I’m having trouble doing the same for net savings rate. Can you elaborate? Thanks!