David A. Burd, CFP, and James S. Hemphill, CFP, CIMA, two financial advisers with TGS Financial Advisors, (no financial relationship, but they did send me a free copy of the book) have written a delightful little book aimed at the graduating resident entitled Pay Yourself First: A Financial Guide For Doctors Entering Practice, not to be confused with several other books with the same title. It is self-published, but well-edited, and just 61 short pages. They estimate it will take you an hour to read it. Maybe if you're really slow. Certainly it shouldn't take two sittings. It is available at the time of this writing for $2.99 on Kindle and $13.49 for the written version.
A cynic might argue that this entire book could be summed up in my frequently used phrase “Live Like a Resident” but I think there are enough pearls in the book to make it worth the time of the vast majority of residents and brand new attendings. Most books of this genre written by financial advisors suffer from the same flaw- the advisors wrote the book to try to get some new business. They want to give you enough information that you think they're brilliant enough to handle your money, but not so much that you can do it on your own. I'm not entirely sure why they keep writing these books, since in my experience it's the do-it-yourselfers who read them all. However, the authors keep the self-promotion and advertising to a minimum, mostly just right at the end of the book (skip the last 3-6 pages if you don't like being sold to) and manage to provide information that will be useful to those who use other advisors, those who hire them for advice, and those who choose to do it themselves.
Book Overview of Pay Yourself First
Now, let's look at a few of the pearls that will give you a taste for the book.
I'm entirely persuaded by the idea that money must be secondary to a physician's mission. Yet as a financial advisor with doctors as clients and friends, I'm also very much aware of two things: 1) Doctors as a group significantly underperform most other professions at accumulating wealth, in relation to their incomes and 2) Many doctors worry, chronically and seriously, about their own personal money situations.
[After comparing a physician couple who made good decisions and one who made more typical, but less good decisions, leaving them with an investable net worth of just $600K at retirement]…Their situation is a far cry from poverty. They have more assets, and will spend more income in retirement, than the majority of Americans. But this is surely not what they expected their retirement to look like, back in the 1990s at the peak of [the doctor's] career, when their annual income was over half a million dollars. The pattern of your life will be your own, but you are likely to find echoes of the lifestyle choices made by these two physician families, and of their financial consequences in your own experience. One factor in particular is worth noting – it is not your gross level of income that will buy you financial security; it is the decisions you make on how to allocate that income stream – the relative percentages directed toward consumptions and toward savings.
Based on more than a quarter century of working with doctors, we suspect the chance you will wish to retire early is greater than you think now, at the beginning of your career….We hope your medical practice will be so rewarding that you will choose to practice into your 70s, even if you have the wealth to walk away at 60….But just in case medical practice becomes even more stressful, we like the idea you might be able to regard your work as a free choice, and not as a perpetual involuntary economic necessity.
Unlike status based on earning or spending, research suggests that attaining $1 Million of net worth is associated with a permanent increase in confidence and self-esteem.
Unfortunately, the relationship of wealth to happiness is asymmetric. Moving up is often only temporarily rewarding. But losing ground – suffering even a limited reduction in socioeconomic status – is durably painful. Given the limited half-life of the joys of an enhanced lifestyle, we suggest retaining a healthy baseline skepticism about status….Remember, the highest status activity you engage in, and the highest value you contribute to the world, will always be simply your work as a physician.
Who has the greater incentive to chase after your business? The insurance guy soliciting purchase of a whole life insurance policy that will pay him an $8000 commission, or an investment adviser who will earn $300 for managing that same $20,000?
As you can see, the late saver does not ever catch up to the early saver, despite saving for twice as long and putting aside twice as many dollars out of income….This is a hidden cost of medical training that most non-physicians simply cannot understand….If you wait to start saving until you have acquired all of the things you want, you will lose precious compounding time you cannot make up later.
Nobody expects you to drive a 1995 Honda Civic and live in a rental apartment. You can expect to live in a comfortable home, drive a new, safe car, and enjoy meals out and relaxing vacations. Will that be a Toyota Camry, an Acura MDX, or a 7-series BMW. Will your home be a 3,000 square foot used house in a great school district, or a 6,000 square foot new-construction McMansion? Will vacation be a week at Disney World, or ten days skiing in Gstaad, Switzerland….Please understand we are not making a moral judgment about which path you choose. Frankly, we believe you should buy what you darn well please….But understand that, in weighing these choices, you are not negotiating with us. You are negotiating with yourself – your future self, in ten, twenty, even thirty years from now.
To be most effective, savings should be automatic, tax-efficient, and directed toward the highest available, risk-adjusted, after-tax economic return.
To get richer, faster, you simply need to save more.
Think long-term and measure long-term. Ignore the short term. In fact, don't even open your statements if the market is going through a bad patch.
Since 2000, the investment winds have been in our faces, not at our backs. That doesn't mean you can't build financial independence. But we can't expect investment miracles to make up for savings deficits, and we can't afford to squander any portion of today's modest investment returns by the typical individual investor's reactive, error-prone attempts at active management.
The smartest buy is usually an understandable, well-built used house, not a trendy new McMansion….To a much greater degree than you expect, the cost of upkeep and utilities will scale with the size and luxury of your home, and the extent and beauty of your grounds.
Choose your friends wisely…the more uniform and expensive the lifestyles of your friends, the higher the pressure to comply with the implicit status expectations of your peer group. Some of our most financially successful clients have the most eclectic groups of friends.
[After a list of characteristics of a good advisor]…notice what is not on this list. You don't need an advisor to beat the market (few do), to protect you from portfolio declines (a hopeless task and in practice a sales pitch for high-cost insurance policies), or to help you discover the meaning of life.
We discussed earlier why insurance agents are often the first advisors to approach young doctors. The high commissions in whole life insurance provide an attractive payday for an insurance agent. What often results is a physician with good disability insurance coverage, a $10,000 per year premium for a whole life insurance policy she eventually realizes she doesn't need, and a lasting skepticism about financial advisors.
Should You Read Pay Yourself First
The book is short, but great. It would be wonderful if every doctor read it prior to residency graduation.
Have you read the book? Did you like it? Can you relate to the quotes from the book (I certainly could)? Comment below!
‘You are not negotiating with us. You are negotiating with yourself- your future self’ is a hard concept to acknowledge and doesn’t stop one from justifying one’s decisions to his or her peers.
Also, I hope there is a reader out there driving a 1995 Civic and living a rich life in an apartment.
Thanks for the review, doc.
I like the recommendation to not even open your statements if the market is bad….especially wise for younger physicians who have someone else rebalancing for them. Obviously not true if you are balancing everything yourself but still an interesting approach.
Second, a 10,000 a year premium for whole life is actually fairly low cost compared to what most doctors will be offered….try 50-100,000 dollar whole life policies and you get the real wolves blowing down your door. Blechhh.
I still can’t get over the guy on the boglehead forum who was paying 80 a year for a whole life policy. I never followed up on the thread, but I hope he got out.
Unfortunately those stories are a dime a dozen. Hopefully over time, with sites like this one, our colleagues can learn to avoid that situation. Too often we allow fellow physicians to make financial mistakes instead of protecting them from the sharks.
I see $50-100K per year premiums all the time. Just last week I ran into a client who the advisor had suggested $72K per year premiums and who thought that was too much, so cut it back to $48K per year premium. One year into it, the surrender value is zero and the client wants to know how to get out without losing everything.
You can still go months (or even a year or two) without looking because you simply don’t have to rebalance very often.
But I still see at least one resident in a program buying a BMW. Attending 1-4 years out of training buying 1 million dollar homes, etc.
I’m one of the authors, and grateful for Jim’s kind review. We surely see new attendings buying BMWs, but more damaging is buying McMansions, because so many other expenses scale directly with the cost and acreage of your house. (If you buy the 5-series BMW and keep it for fifteen years, like a friend of mine, it becomes reasonable.) A good friend’s wife is a realtor, and a large subset of her clients are attendings in practice for five years, making good money, all looking for a new $1.5 million house in one of two or three specific Main Line communities.
More than any other decision, buying the trophy house will dominate the trajectory of your finances for decades. We know this from observation, and hope to have some more robust survey research to back it up in the not-too-distant future.
While I agree with a lot of what you say, I’m not sure that making a purchase of an expensive home always means you’ll be behind. I agree it does limit cash flow, but what is the likelihood the difference in rent vs mortgage is invested?
Furthermore, once tax deferred accounts are maximized you are investing after tax dollars which are doubly taxed. At least for now larger mortgages provide some write off and allow for real estate appreciation long term (only realized if home is sold).
I’ll use myself as an example. I am 5 yrs out of residency, have maxed out tax deferred SEP IRA every year, current net worth around $500k including 8 months emergency fund and the mortgage rate at 4.3% which I overpay every month. Granted, I have no plans on buying another home and it is just under 3k sq ft. I did jump on the opportunity to buy when market was close to nadir and don’t regret it.
The other side of the coin is that I’m still single and without kids. That will likely change at some point, but although I could save more money there’s no guarantee I’ll live to retirement.
I’m surprised you can’t refi that down into the 3 range
There were no rates for jumbo loans under 4%. I agree the maintenance costs of a home can get large, but my square footage is under 3000 and the costs are not very large.
I would like to agree with one of the authors (Jim Hemphill) regarding the trophy house. My wife and I did just that right after my fellowship. That one decision has adversely affected our net worth to the tune of many hundreds of thousands of dollars, if not low million dollars. Despite a 3.25% mortgage loan, the inherent lifestyle inflation and maintenance required to maintain this property over the last ten years was astronomical: landscaping service (property/gardens too big for me to do), private schools for the kids (local public schools not so good), maintenance (roof, driveway, resurface tennis court, pool service, etc), home furnishings, etc, etc. My BMW was the least of my expenses!
Fast forward about ten years, with strict discipline and luck, all is well. I’m glad I woke up in time to face reality. That being said, it would have been a cake walk without the trophy house and all the other inherent costs. Expensive lesson learned.
On the flip side of this is the premium some pay to be in a good school district rather than to buy the big house. This may be one reason to buy the expensive house.
In my area, cost of homes in good school districts are about $200-300k more (entry level home: about $900k). However, the cost of private school is $30k per year. Even if you are looking only at 4 years of high school and 2 kids, you can see the problem there. If you want to put your kid in private school for elementary and junior high, well, that’s another story…
I heartily agree with you that the school districts matter. A good public school district may warrant the premium for a relatively more expensive home. That being said, the house doesn’t need to be a big estate either. If I wasn’t paying for several private elementary/junior high and probably high school tuitions, I could have their college tuition completely funded and be retired now! Again, another expensive lesson learned!
Sounds like the Bay Area to me. The most expensive private school is my area is $10K a kid. And you can get into the top public schools with homes of just $300-400K. But you’re right that if buying a more expensive home will cause you to go public instead of private, you probably ought to factor that in.
A couple of points. First, it isn’t about buying vs renting. It’s about buying or renting an expensive home, vs buying or renting an inexpensive home. There are plenty of ongoing costs of home ownership even after the mortgage is paid off.
Second, money isn’t “doubly taxed” in a taxable investing account. The principal is taxed as you make it. That is never taxed again. The earnings are taxed, of course, but no dollar is taxed twice. In fact, if you die and get the step-up in basis, some earnings are never taxed at all.
Buying ~ 2010 was almost surely a great move, as long as the home is reasonably affordable.
BMW’s aren’t all created equal. Many different price points. I bought a BMW 3 years after residency. I paid $36500 for it (military discount). I think sticker was 44K. I’ve had it 3.5 years. I intend to have it at least another 6 to 7 years. At 10 years it will cost me about $3800 a year to have the pleasure of driving the ultimate driving machine.
I do get your point though. I see a lot of people buy pretty pricey homes and cars pretty quickly without paying down any debt.
The ultimate driving machine not only gets me to the ski resort on a powder morning, but will also pull my boat to Lake Powell. 🙂