I have a confession to make. I'm not frugal. I used to be. In fact, I was pretty frugal for a good portion of my life. Maybe I still am in the view of many physicians, since I drive a 13 year old car I bought for $4K four years ago. But I don't see myself as frugal at all. However, what I am, and what most physicians need to be if they hope to be financially successful, is to be relatively frugal. Luckily, being relatively frugal requires far less discipline and deprivation than actually being frugal.
There are dozens of books in the library (since frugal folks don't actually buy books) and blogs on the internet that encourage you to be frugal. They teach you how to find coupons, how to reuse dryer lint, how to pay for cheap dates, how to get a deal on a used car, how you can set your thermostat at 86 in the summer and 62 in the winter by using fans and sweaters, and how to reuse paper towels and sandwich baggies. Some, such as one of my favorites, Mr. Money Mustache, even advocate that being frugal will not only make you happier and healthier, but save the planet at the same time. The Mustachian philosophy is basically that you should teach yourself to desire less so you can be happier.
Buying Happiness
The problem with that philosophy is that it isn't true. Spending less DOESN'T always make you or me happier. Now, don't get me wrong. I'm a huge advocate of spending your money on what makes you the most happy. If you care about having nice cooking equipment but don't care if your bicycle is a beater, then you know where to spend the money. If you like eating out but don't enjoy expensive resort vacations, then spend your money in your local restaurants. However, spending money properly can pay huge happiness dividends.
As regular readers know, my wife and I spent a couple of weeks in France this summer celebrating our anniversary. We had a wonderful time. We spent with reckless abandon. We took a direct flight. If we wanted to do something, we did it. If we wanted to eat something, we ate it. Instead of taking cheap trains and staying in hostels, we drove (paying a small fortune in rental fees, gas, tolls, and speeding tickets) and stayed in bed and breakfasts and nice hotels (well, except for one in a small town in the Alps.) The psychology literature is pretty clear that spending on shared experiences with people you care about does make you happier. So let's quit pretending it doesn't.
I also bought a fancy new, expensive mountain bike this year. Compared to my twenty-year old aluminum hardtail, riding this bike is like an entirely new sport. The bike practically drives itself over rocky obstacles. Riding it really makes me happy. I'm sure other people feel the same about their luxury cars or clothes. Sometimes stuff makes you happy too.
You also don't get to take your money with you when you go. When was the last time you saw a hearse with a trailer hitch? I'm sure I'll leave some money to my heirs and my favorite charities (not to mention I also give to others and charities as I go along.) But it seems a shame to make a physician salary and spend 80 years living like you're a resident. Luckily, you don't have to do this to be financially successful. What you do have to do, however, is be relatively frugal.
Relatively Frugal
Being “relatively frugal” means being frugal relative to your income. If you're putting away 20-40% of your gross income toward savings, retirement, college, and other long-term goals, then it's okay to spend the rest. Take a doc making $400K who has paid off all of his student loans, has his mortgage half paid off, wouldn't dream of carrying a balance on a credit card, and is putting $100K toward retirement each year. He might be paying another $80K in taxes and giving $20K to charity each year. That still leaves him with $200K, or $16,667 per month with which to do whatever he likes. You can buy a heck of a lot of stuff and experiences with nearly $17K a month.
If he hates his job, he can live on a third of that and put the rest toward becoming financially independent by 40 or 45. If he enjoys his job, he can spend it all and shouldn't feel a bit guilty about it since he's still on track for an early, comfortable retirement. Relative frugality. That's the key. And it works whether you're making $50K, $150K, $250K, or $750K. So residents, young attendings, and their spouses, fear not. Make the right decisions early on and eventually you can be “relatively frugal” instead of “just frugal.”
What do you think? Are you frugal? Why or why not? Are you frugal relative to your income? How did you decide how much of your income to spend? Am I an idiot for spending more on my bike than my car? Comment below!
Yet another awesome post, WCI. It is so rare to have someone who is knowledgeable, honest, thoughtful and willing to share personal details and ideas. My wife and I are frugal by nature. We didn’t have much money growing up and I think that helped us appreciate the value of a dollar. The book Your Money or Your Life also helped us prioritize our expenses in terms of our values and fulfillment. She was supportive of “living like a resident” for my first few years of private practice. We saved and invested and paid off all debt. Now we are much more free to spend on whatever we like. We are not very materialistic (not that I have a problem with those who are – it just isn’t us). We don’t have expensive cars, a McMansion, country club membership etc. but we pay a lot for insurance, health care, education and vacations (including a $20k trip to China last year). It is hard to be frugal early on but the dividends it pays are huge – both financial and peace of mind. Given physician income it is relatively easy to save large amounts of money over time and still live very well.
Since this has become a tax posting too…. I think I’m at effective rate of 28.55 Federal for 2014 (39.6 marginal). I pay more in tax than I ever dreamed of actually making.
On the subject of tax rates, 2014 is %28.4 Married and filed jointly.
That’s with no savings contributions (paying down debt first) and an income guarantee we took from the hospital to help during our early months of the practice (we wish we hadn’t taken it now). The income guarantee bumps our income up 70k, so we pay taxes on it. Luckily, it will be done this year. Phantom income is a term I’ve come to hate!
We did switch to filing as an S-Corp for our business, which reduced our effective rate from 35.4% in 2013… definitely a difference there.
Once we finish our debt payoff and maxing out our retirement accounts, I’m certain we should at least be in the low 20’s…also plan on buying some real estate investments and utilizing depreciation from that venture.
You got 7% lower just off an S Corp? What percent of your income are you calling distribution instead of salary?
I only claim 75k as salary, the rest is distribution. Our accountant said this was fine with the IRS, even though, it should be higher since it seems a little low. I guess it’s up to the IRS to determine that, kind of a grey area so there’s wiggle room for interpretation on what’s a “reasonable” salary.
It helped to fix our monthly income so we budget more effectively and use the draws to pay down debt. Once were done, I think we’ll bump up the “salary” portion a bit more just for peace of mind…
I think you’ll lose that audit. $75K for a doc? Really? But you’re right that if you’re never audited…you win!
My general rule is no less than 1/2 of your income should be salary, and that you should have something concrete to base it on- salary surveys etc.
I agree with your statement. People do confuse Optometry with Ophthalmology, they would probably think were optometry just like everyone else, thus our salary numbers would be shifted.
We’re rolling with it for the year until were done with debt, then adjusting it up. There’s other business people we know putting there porsche through the business, which to me seems even riskier, but I don’t see the IRS chasing them down either. It’s all about what your comfortable with doing.
Maybe someone could come up with some IRS risk insurance so we can feel more comfortable taking risky maneuvers. Then again, the IRS might see that list as an automatic target!
I didn’t realize you were an optometrist. $75K is probably okay then I suppose, although I’d have to look up optometry salaries to know for sure.
I am an Ophthalmologist, I was just pointing out how confusing it is to most people the difference! I figure we can use that to our benefit, since it’s another grey area. Usually, once people have needed or been to an Ophtho they understand, otherwise, were all eye docs to most.
Who knows? Might help in an audit. Still seems like a pretty low claimed salary for a surgical specialist to me.
The key is “In the Audit”. The chances of an Audit if you are not doing any red flag moves (like home office expense) is slim to none IMHO. i know of one guy, personally, that was audited and i did his taxes and i almost expected him to be audited. 75k is exactly the amount i would recommend to anyone and i know CPA’s who do use that number if they are “shrewd” or worse the expense, if you ask me; especially someone that has a practice, plenty of room to work the loopholes. if you can show the numbers; you can show the numbers. there is a lot you can deduct. advertising can be very expensive and can be paid to just about anyone. and depreciation you can front-load and then “adjust” it in a later tax year. anyway, my two cents. I need that CPA’s number. it is his name on the return afterall.
It’s also your name. The other downside of a tiny S Corp salary is that it really limits your retirement account contributions. Distributions can’t go into retirement accounts, only salary.
Also, that was the largest variable I could contribute to our decrease in effective tax rate. We haven’t really done anything else.
I live happily on $3k/month, but don’t have a spouse, who can go out and buy jewerly and resort vacations, thank god.