About three years ago I wrote about what you should do if you get a windfall. I just went back and re-read it. It's a good article. However, it is written mostly from a theoretical point of view. That was the only way I could write about it, since I had never really had a windfall at the time. However, today we're going to get a little more personal.
Lump Sum Windfalls Versus Income Windfalls
There are really two kinds of windfalls out there. The one we usually think of is a big fat lump sum, such as an inheritance or lottery winnings or exercised stock options. However, there is another type of windfall, an income windfall. This is when you get a dramatic increase in income that you did not expect. Most doctors experience a dramatic increase in income once in their life- when they leave training, but that is an increase they've been expecting for years, and is one of the main reasons they went through all that school in the first place. But imagine, if you will, another increase in your income that you did not expect. That's an income windfall.
My Income Windfall
In the last couple of years I've had two income windfalls. You see, when I left the military, my financial plan was to make $225,000 per year for the next 15-20 years, save $60,000 per year, and then become financially independent in my early 50s. It was a good, conservative plan with reasonable assumptions. That was what it was going to take for me to come out ahead financially leaving the military. If I didn't make that much and save that much, I would have been better off (financially anyway) spending 16 more years in the military and getting a military pension with Tricare (free/low cost healthcare for the rest of my life.)
However, it turns out that as a partner in my private, democratic emergency medicine partnership, I make a lot more than $225,000 a year. In fact, the income for the average emergency physician has gone up fairly dramatically in the last 5 years. The 2015 Daniel Sterns survey indicates that the average emergency medicine partner makes $343K, and it turns out we're above average thanks to a well-managed group with good insurance contracts, good documenting/coding/billing habits and a decent payor mix. This year was particularly good to us.
In addition, I have this little business on the side where I type a few random words into the internet, and a bunch of money comes flooding back. I even wrote a book and random strangers just keep buying it. In 2014, that little business was the equivalent of being married to a primary care doctor. In 2015, it was the equivalent of being married to a well-paid specialist. While I work hard for both of these sources of income, and try to provide as much value as possible to my patients, readers, and advertisers for that income, it turns out that both have paid me far more than I ever would have expected five years ago. I have an income windfall.
While a good problem to have, this income windfall leaves me with a dilemma. I started the blog and book under the premise that doctors make plenty of money and if they manage it well, they can be financially free relatively early in life. My wife and I became millionaires seven years out of residency (ages 38 and 35 respectively) purely based off physician income, which averaged $180,000 over those seven years. Neither the book nor the blog really had anything to do with it, other than helping me make smart financial decisions.
But at the present rate of growth (or even at 1/4 the rate of growth) of WCI, I will soon be making more money outside of medicine than inside of medicine. Thus the dilemma. Do I continue to advise readers to stick with medicine, investing 20%+ of their gross earnings into classic investments like stocks, bonds, and real estate? Or should I tell readers to do what I did, embracing their inner entrepreneur to discover a way to become wealthy even faster?
It took me 4 years of college, 4 years of medical school, 3 years of residency, 4 years of paying back Uncle Sam, and 2 years as a pre-partner (17 total) to get an income equivalent to what I now get after screwing around part-time on the internet for 5 years, a large chunk (but nowhere near all) of which is completely passive. I feel a bit like Mr. Money Mustache. He blogs about how he and his family live on $25K a year and you can too, all while he has a website ten times as popular as mine which is almost surely generating hundreds of thousands per year (and if it isn't, it's only because he has chosen not to.) [Update prior to publication: My wife says I shouldn't minimize the amount of time, effort, and passion I pour into the site. “Those aren't just random words,” she says. “I certainly can't do what you're doing there and neither can most other people.”]
I suppose I'll continue to write about both ways to become wealthy. My original plan was working. It was working just fine. We would have still become financially independent in our early fifties. But here I am at 40, financially independent of medicine and now practicing only because I love it. I'm not completely financially independent (i.e. I still need to work at something), but if this nonsense keeps up much longer, I soon will be. That's because, aside from a brief manic splurge of spending in 2014, we're really only spending like we did on 70% of a pre-partner salary (a high five-figure amount after tax.) The rest of this income is going toward other places. And that's what the rest of this post is about.
Taxes, Taxes, Taxes
A higher income is mostly great. But it comes with a very serious downside, and that's an obligation to Uncle Sam. Most types of income are taxed, but perhaps none so high as earned income, on which you pay income taxes at your regular marginal rate, plus payroll taxes (including the PPACA taxes) and then when you spend it, sales taxes, and depending on what you buy, maybe even property taxes every year while you own the property. So my first word of warning to you, dear reader, should you also have an income windfall, is that your tax bill is going to be far higher than you think. As a practicing physician, I have been in the 15% federal bracket and the 0% state bracket (if you're interested in that, I can get you in touch with a recruiter.) I have now also had the experience of not only being in the top bracket, but also of having nearly all of my exemptions and credits and many of my deductions phased out.
If you also pay charitable contributions as a percentage of your income (think “tithe”), you can add that on top of your taxes. It's quite possible that 50-60% of each dollar of that income windfall will not be going into your pocket. Plan accordingly. Despite paying 10% more than I owed last year using estimated quarterly tax statements, I fully expect a massive additional tax bill in April. When you combine that with my 2015 defined benefit plan contribution and my 1st quarter estimated tax payment for 2016 all due at the same time, it will probably feel like I've got the sword of Damocles hanging over my head for the first four months of the year, hoping my income for that year is enough that I don't have to sell investments to pay the tax bill for the previous year. It's tricky to estimate your tax bill with a rapidly rising income.
My overall attitude toward money is one of stewardship. I subscribe to Bogle's “Enough” philosophy rather than Trump's “Never Enough” philosophy. I only need a certain amount to be happy, and beyond that, it doesn't make me any happier. So I like to imagine that I'm merely managing the money (for family, God, society etc) trying to put it toward its best use. So while some of this income goes toward meeting my financial goals (more on that below) a significant portion also goes toward others. For me, that means giving to charities I support, funding the WCI Scholarship, starting college funds for nieces and nephews, and providing jobs for others (the whole “teach a man to fish” philosophy.)
But I'm also human. So I spend some of my income windfall. There's no way I would have been able to purchase that boat with cash this year and meet my other financial goals on just my physician income. WCI paid for the boat. Likewise, if you have an income windfall, it's okay to spend some of it. But unless you are very sure the income will continue, I would encourage you to spend it on one time items rather than obligating yourself to ongoing required expenditures. That is to say, blow it on a vacation, not the down payment on a vacation home.
Accelerating Financial Goals
The main use for this additional income is accelerating our financial goals. All of our financial goals have an endpoint. When I get enough into the kids' college funds, I'm going to quit putting money in there. Sure, I might increase the goal a little just because, but it isn't a bottomless pit. Same with their “20s” funds. This is non-529 money they can spend on anything they like- a wedding, a honeymoon, missionary work, a summer in Europe, a car, more education, a house downpayment etc. I view this as getting part of their inheritance when they can really use it (i.e. your 20s) rather than when hopefully they won't need it (their 60s.) The mortgage payoff fund is exactly the same and is probably the last debt we'll ever have. Even retirement can be funded in advance.
By putting this income windfall toward financial goals, we reach those goals literally years sooner than we had otherwise planned. One great benefit of putting windfall income toward financial goals (rather than spending it) is that if it turns out the income windfall is only temporary, you don't have to cut back your lifestyle after it's gone, and you're still much closer to your goals. Of course, reaching those goals further reduces your need for future income. If I pay off my mortgage, that's $2500 less I need to make every month in the future even if my income gets clobbered. If I have “enough” saved for college, then I no longer have to have sufficient income in the future to save for that. And if you can reach financial independence, you can also drop costly life and disability insurance.
Make Sure You're Living The Life You Want
Perhaps most importantly, it's a good idea to take a look at your life and ask yourself if that is how you would be living if you had all the money in the world. If it isn't, see what changes you can now afford to make. For instance, I kind of hate night shifts. It's mostly different medicine with a different population of people (more psych issues, more drug abuse issues, more undiagnosable abdominal pain etc.) There's probably more liability and certainly the services of the hospital and consultants are less available, increasing risk and decreasing patient satisfaction (and my own.) Nor do I enjoy forcing myself to stay awake at 3 am. And most importantly, I don't like the 1-2 days it takes me to recover afterward. So I'd love to drop them. My group pays a large night shift differential, so there is a very real financial cost to doing this, but since I currently have plenty of income for my needs, wants, and reasonable financial goals, I can afford to drop them and will be doing so soon. If you have an income windfall, take the opportunity to change the aspects of your practice you don't like.
Likewise, I really like going on adventurous trips and spending time climbing, skiing, and biking in the Wasatch mountains near my home. Long-term blog readers have figured out I pretty much go on vacation for a few days every month. It might just be visiting family or it may be a big vacation to Europe, but more commonly, it's a trip to go boating, climbing, or canyoneering with friends, family, or both. But if I try to wedge in two of these trips in one month, especially if I'm also traveling for WCI, then the month gets really full and my kids start wondering where I'm at, and I like being there to help them grow up as well. So I'm cutting back on my shifts a bit. Unfortunately, that requires 9 months notice to allow the group to hire someone to work “my” shifts. If you have an income windfall, it gives you an opportunity to reset your work/life balance.
Additional income also allows you to jettison chores you don't like. For example, if you hate mowing the lawn you can hire someone else to do it. I hired some house cleaners this year, because we have a new baby and I didn't want to do any more cleaning than I already am. I'm also not a fan of working on our cars or boat. So now I pay someone else to do it. If you have an income windfall, eliminate your onerous chores.
I know this post is lengthy, and that this particular post is more personal than most, and I certainly hope it doesn't come across as “humble-brag.” I happen to believe that blogs are best when they're personal, and these are the financial issues (i.e. first world problems) we're currently wrestling with. I sincerely hope you get to wrestle with these issues at some point in your life as well. Hopefully you found something in this post you can apply to your life, whether it is practical advice for dealing with your own personal income windfall, another reason to feed your inner entrepreneur, or just a little inspiration to learn a bit more about personal finance and investing than you now do.
What do you think? Have you had an income windfall? How did you use it? How did you keep from increasing your lifestyle to consume the additional income? Comment below!