By Dr. James M. Dahle, WCI Founder
Once every couple of years I have medical students from the local medical school over for dinner. At some point, the conversation usually turns to finance, and I commiserate with them about their loan burdens. I typically toss them a few pearls of wisdom, wish them good luck, and we move on to something else. They always think it's funny when I say, “If you can't live on $200K, you have a spending problem, not an earning problem.” Of course that's true, they think. They can't even imagine why I would say such a thing, since no doctor can possibly have trouble living on $200K.
I almost never use that line when I'm talking to attendings, even though it is no less true. It comes across as preachy, and sometimes impossible. Why is that? Well, it's because doctors spend too much money. I've spent a lot of time thinking about why that is and came up with 10 reasons. Let's talk about them.
Top 10 Reasons Doctors Spend Too Much Money
#1 Pent-Up Deferred Gratification
Reason number one is that we deferred gratification for so long, that when we first start getting a real paycheck, instead of having a little lifestyle inflation, we have a lifestyle explosion. When you tell yourself the big money is coming for a decade or a decade and a half and then it finally arrives, well, it seems like time to buy a bunch of stuff you've been putting off for pretty much, well, forever.
#2 Lack of Understanding of Our Progressive Tax Code
Another issue is that docs don't have much financial literacy. In particular, they don't understand how the tax code works. They see that their salary after residency will go up by five or six times, so they assume they can spend 5-6 times as much as they did during residency. They forget that 1/4 to 1/3 of their earnings will go to the taxman. A 300% increase in net earnings is still great, but it is very different from a 500% increase. To make matters worse, doctors put off a bunch of things during their training (see #1 above) and those things include saving up a down payment, starting retirement accounts, getting enough insurance in place, and paying off their loans. Add those things on to the tax bill and all of a sudden their increased spending potential is really only 50%-100%.
#3 Societal and Family Expectations
Another major difficulty for doctors is that everyone else sees them as rich, even if their incredibly negative net worth actually ranks them as being some of the poorest people on the planet. Their parents, siblings, spouse, children, and physician partners all have expectations that their spending will be in keeping with their new position in life. Except their financial position hasn't actually changed.
They may also be hanging out in a circle of high-earning friends, and feel some pressure to keep up with the Joneses with regards to vacations, schooling, transportation, housing, recreation, and children's activities. Here's an idea—make it easier on yourself and start hanging out with like-minded peers on the WCI Forum, Facebook, or Reddit groups. This is a circle of friends that will help you fight and win the battle of expectations.
#4 A Sense That Money Is Their Most Renewable Resource
Some doctors get this idea in their head that they can get $15,000, $20,000, $30,000, or even $40,000 every month for the rest of their life. They can't ever foresee a period of time when their income could drop or they might not be able to work. (Although the COVID economic downturn gave many their first experience at a massive drop in income.) They have staked their entire financial plan on being able to work until the day they die.
Sometimes, they add on a disability policy to protect that income, but they often cannot protect the entire wad. Plus, there are a lot of things that can cause your income to drop that can't be insured against, like complaints to the medical staff or medical board. And disability insurance only pays until your mid-60s, anyway. At a certain point, they will need either savings or another source of income.
#5 People Spend What's in the Account
Doctors are people, just like everybody else. People spend what they can see. If there is $1,000 in the account, they figure they can spend $1,000. If there is $10,000 there, they spend $10,000. I mean, it's not quite “I didn't know I was out of money, there were still checks in the checkbook,” but sometimes it isn't much better.
#6 Not Sure What to Do When Retirement Account Is Full
Some doctors don't understand that they can save for retirement outside of their employer's retirement account. And that might only allow for $19,500 a year, hardly enough to fund the desired retirement of most physicians, especially if they don't start early or don't invest it aggressively. Many doctors don't even know about Backdoor Roth IRAs, Stealth IRAs, and Individual 401(k)s. And heaven forbid they invest in a taxable account. They'd rather buy whole life insurance as their “financial advisor” recommends.
#7 Disconnected from Middle Class
Many doctors become disconnected from their middle-class roots or never had middle-class roots in the first place. These are doctors who think that cars that have more than 50K miles on them aren't reliable. Or that a $20K car is a beater. Or that the local state university can't possibly provide a decent education, much less the local public schools. They must shop at Whole Foods, not Wal-mart. They can't imagine flying coach on an overseas flight. I'm always amazed that the public schools are just fine according to people who don't have the cash to send their kids to private school, but that apparently 95% of the country has terrible public schools if you ask doctors or their spouses. I've even been told that the public schools in towns I've lived in are “terrible” despite all objective evidence to the contrary. I'm told it is impossible to live on a resident salary, when fully half of the households in the country seem to be able to get by on less than that.
Forgotten the difference between needs and wants? Go backpacking and it'll remind you in a hurry.
#8 Don't Realize Just How Much Must Be Saved for Retirement/College
Some doctors spend too much because no one ever told them they need to save 20% of their gross income for retirement. They simply haven't run the numbers and realized that they need to save a massive chunk of their income if they actually want to meet their financial goals. Even at the State U, college is expensive stuff, but that's nothing compared to retirement.
Most physicians will need a multi-million dollar nest egg to maintain their standard of living after retirement. That doesn't just magically appear at the end of 30 years thanks to the miracle of compound interest. A big chunk of it actually has to come from brute force savings.
#9 Don't Understand That Doctors Aren't All the Same
Sometimes doctors think that just because they went to medical school with somebody that they should be in the same socioeconomic class. Guess what? There's a big difference between your possible lifestyle when you're an academic pediatrician making $150,000 and a plastic surgeon making $750,000. That surgeon can make all kinds of financial mistakes and waste all kinds of money and still come out smelling like a rose. If that pediatrician tries to live like the surgeon, it isn't going to end well.
Even high-end doctors fall into this trap. They know they're in the 1% but they forget that the 1% encompasses a very wide range of incomes. Too seldom do we look at those who make less than we do and feel gratitude for our income, because we're too busy enviously looking at those who make more than we do.
#10 They Think Spending Brings Happiness
Sometimes doctors and other high-earners fall into the trap of thinking that they can spend their way toward happiness. That bigger house and nicer car will surely make us happier, right? The next step after realizing stuff doesn't make them happy is to start seeking experiences. They travel the world and take up all kinds of crazy new hobbies. But, in the end, there are really only three things we need to be happy, and none of them cost much money:
- Someone to love
- Something to do
- Something to look forward to
I mean if there is something or some experience that you can buy that you think is going to make you happier and you can afford it, then go buy it. But pay careful attention to how much happiness you actually get from it and adjust future spending accordingly. Many of my favorite vacations and trips are the cheapest ones. And I can assure you I'm no happier driving my wife's 2016 Sequoia than my 2005 Sequoia, even if hers does get the boat up the hill a little faster. You can never get enough of what you don't need.
There you have it. Ten reasons why doctors spend too much money. Did I miss any? Why do you think doctors spend too much? Comment below!
A combination of Number 1 and Number 10 are probably the biggest reasons. We delay spending for so long and grind through training with the expectation that we will be able to spend big when we finish. The assumption there is that spending big is going to make us happy, and the evidence there just doesn’t show that’s true. Spending money on things doesn’t make most people happy.
Family expectations cane be huge, too. I’ve gotten pressure to buy the bigger house since the day I finished training because my in-laws see my family of 5 living in a 1100 square foot house and my two oldest kids sharing a room. They just don’t “get it” because I make “doctor money” (even though I’ve never discussed with them how much I make). I try explaining my huge debt burden, savings for retirement and my kids 529…. but they still don’t get it.
In the end, most of us Americans are “Cathy consumers.” We spend what’s in the bank account. It doesn’t matter how much money that is. Just look at NFL or NBA players who make millions. They fall to the same trappings. If they just put a few million of that $20 mil that they make, they’d be set for life. Most Americans spend like we are immortal.
Agree with all of the above- great article. I would add a #11- Clueless. I mean this will all due respect, of course. But many physicians, while very bright, are just plain dumb when it comes to anything financial. They have spent a decade + of their life training to do one thing and have forgotten more things than most people learn in a lifetime. This has consequences – they have not sufficiently spent enough time learning what do with money, how to invest it, how to save it, how to reduce tax burden, etc.
Clueless sort of summarizes several of the points above. But another thing that makes us clueless about finance is our high intelligence. How many times have you hired someone to do something and realize that if you had the time and possibly even without any training you’d do a better job than they did? Maybe it’s just The rural areas where every body becomes a contractor that I have lived in, but when I hire a lower cost bidder who is local I often wish I had the time to learn the trade and do it myself, or the sense to know whom would be worth paying twice as much.
It’s a little easier for most of us to recognize we aren’t expert electricians or carpenters than that (maybe) we can’t do a white-collar task like our taxes or manage our money as well as warren Buffett since that just takes intelligence, right? And it looks pretty easy compared to fixing some of the patients we run into.
@Jay-Thank you for pointing this out. I am a resident in a Surgical Residency and have been trying to financially educate myself so I am not clueless. Yesterday, I was discussing with my co-residents the amount of invested assets required to live comfortably in retirement. She believed you needed $7-10,000,000 in assets (you read that right) to retire comfortably, and more surprising to me two of my other coresidents agreed with her. In our subsequent heated discussion, they listed many of our attendings (including some in their early forties) who they believe have net worths of at least $10 million dollars. I was flabbergasted, and the examples of financial illiteracy coming out of their mouths didn’t stop there. Outside of our medical education, we have a duty to ourselves to be money knowledgeable after our long, long educational journey.
Academic general surgeons in their 40s with 8 figure net worths? Seems pretty unlikely, but not impossible, especially if there is a successful side business somewhere. But more than one of them in a program? What are the odds?
You might want to show them the net worth data from a Medscape salary survey. It’s actually a really small percentage of docs that RETIRE with $5M+. The average is only $2.1M, and that includes everything, not just retirement assets.
You nailed it! Absolutely spot on.
One of the best moves we made in our two physician family to combat #5 was to automatically deduct from our checking account a sufficient amount each month after payday so that the running “balance “ that we see (eg at the ATM) is close to what it would have been as a resident, reminding us to keep it lean in day to day spending. The deducted amount then piles up in a money market for us to use for taxible retirement accounts, vacations, unforeseen expenses etc.
Don’t talk about it too much or your brain will realize that money is also available to spend. Sssshhhh!
Ha ha, don’t worry – much of this “hidden” fund is also on auto pilot, going onward into 529s, taxable funds etc…
The vast bulk of my current wages go to taxes, retirement savings, mortgages, and school tuition. All taxes (federal, state, local, SS, Medicare, property, sales) are more than one in three dollars that come in. Retirement savings has been the next chunk (averaging $70,000 a year in my 50’s). That’s half my cheese gone.
My “big house” mortgage and my retirement cabin mortgage combine to take up the next chunk, but these drop out when we sell the big house and move, paying off the cabin in 1-2 years.
Add in current college savings, college and private school tuition with one in a state college in the fall, and two in a secular private college prep school. Various insurances (home, life, disability, auto, umbrella) and car expenses (wife’s leased Mazda CX-5 and my 2013 JEEP) come next, adding in another chunk. That’s 85% of my cheese.
We somehow spend the rest on clothes, fuel, food, restaurants, entertainment, vacations, internet, cell phones, and such. These days I can’t figure out what we did when I made “only” $250,000, but the taxes, much higher retirement savings, double mortgage, and school expenses are the bulk of the difference.
About half the cheese should be going to taxes and savings.
https://www.whitecoatinvestor.com/doctors-cant-spend-more-than-half-their-income/
Taxes are $135,000 (federal, state, local, SS, self employment, Medicare). Property and sales tax are about $16,0000 more.
Add in the $78,000 I put away and that’s $230,000. That’s half my cheese or more…
Great post! #3, 4, and 8 are big ones. Both 3 and 4 (societal and family expectations and money as a renewable resource) require a bit of self awareness that not everyone learns to develop. Being aware of why you’re spending money on something and understanding that you’re trading your time for that thing. Time is our most valuable resource because it is so precious and greatly limited. When you buy something, you’re giving up a small segment of your life for it. It better be worthwhile! For me, gaining this self awareness of my spending has really changed my spending habits. I used to be so impulsive and now I stop and ask “is this really worth an extra day or two working in the hospital?” Or is that $50,000 Mercedes worth 6 months of my life to save up for? Or would I rather have 6 months of freedom at a younger age in retirement?
8 (understanding what you actually need to retire/send kids to college) simply requires some financial literacy that is completely lacking in many physician’s lives. Learning about the 25X spending rule to calculate your “number” to become financially independent is key. Without at least that much in savings, it’s unlikely you’ll be able to sustain yourself in retirement using a 4% safe withdraw rate. I would venture to say that most docs have never heard of this and have no idea how much to put aside each year for this goal. I didn’t until I started reading WCI!
“Or is that $50,000 Mercedes worth 6 months of my life to save up for? Or would I rather have 6 months of freedom at a younger age in retirement?”
The above statement is EXACTLY how I decide whether or not to purchase things. I am putting roughly $300k into retirement savings each year because I am already looking forward to moving on to the next chapter of my life (I am 43yo). Also, I put 20% of my pay back into servicing the debt on our 2 office buildings that house our practices. I have definitely changed from the person who enjoys spending to the person who enjoys saving. I cringe when I think about some of the silly things I purchased 10 years ago that I thought I needed to have only to not care about them months later. Lessons learned.
I currently work 4 days per week and plan to back down to 3 days here shortly. Done by 50 if I choose to be.
There is hardly a day that goes by that I don’t reference WCI or similar bloggers. Thanks!!
My advice is to do the hard work the first 10-15 years out of residency. If you put off saving for retirement then you end up with an inflated lifestyle and less time for compounding. When you get older you will want to cut back and you cannot. It will help if you find some non-medical people to befriend.
I agree with that last bit. It really helps you stay grounded if you hang with lots of people with 5 figure incomes.
My best friends are teachers—makes it easy to spend more reasonably.
Family members and nurse friends have helped to keep me grounded.
This is a nice mash-up of WCI meets beginner Mustachian. Appreciate how amazing your life already is. Save a ton (we are shooting for a >50% savings rate). Understand that more expensive stuff doesn’t buy you happiness, hedonic adaptation is in the way of that. Try not to want so much stuff. And educate yourself about personal finance.
Good for you Kpeds,
A savings rate of 50% on net earnings is quite doable for the determined physician.
I had to laugh over the private school versus public school comments. When my husband was invited to interview for residency in his hometown, during athe dinner with current residence the night before his interview, all of the residents made comments about how if you moved there and went to their residency program, you would for sure have to put all of your kids in private school because the public schools were terrible. My husband interrupted them and made the point that he went to the local high school just down the road, did well enough to get into a good college, and, subsequently, into medical school…then well enough to be invited for an interview in to their program. So unless things had gone downhill drastically in the last 10 years, then the public schools were just fine, thank you very much. It’s just funny how the expectations for what’s good enough for your children are very different than what was good enough for you yourself when your income is higher.
Oh and this was at the U of U, so your same area now…exactly like you were saying about the perception of public schools in Utah…
A previous discussion on the subject also discussed Utah in particular. Suffice to say it was revealed that there were other reasons people sent their kids to private schools in Utah that had nothing to do with the quality of the education. I’ve got a couple of posts written and in the queue about private/public schools, so no need to hit it too hard today.
It’s really easy to save a lot of money when you don’t hang out with other doctors.
#1 and #3 come together when you have a spouse who has spending habits and desires that are unleashed by the transition to attending salaries. My wife and I are generally on the same page (she’s a bit more of a spender and I’m more of a tightwad) but I’ve seen couples that really break down in discipline when the big bucks start coming.
it is not only physicians that are financially illiterate; its most americans
luckily many more are learning to passively invest
I always flinch when young attending are called “poor” due to their negative net worth. Poverty is much deeper than that and they will never worry about health care, hunger, shelter.
There was a big long discussion about this on the forum recently (without resolution.) Suffice to say you are not alone in your position. The main problem we realized was that there really is no good word for “low net worth” and “poor” has so many different meanings. I continue to use “poor” for “low net worth” even when income is higher, but you’re certainly correct that most of us would rather have a $200K income and a -$200K net worth than a $10K income and a -$10K net worth. If you’re interested in weighing in, you might check that discussion out. I can’t seem to find the link right now though.
Thank you so much for this post! I think it will really help me change my spending habits. I found it extremely helpful. I love the phrase “pent-up delayed gratification” and can really connect with this. This feeling of entitlement: “I deserve to be able to buy whatever I want because I suffered for x amount of years in training, etc.”.
I think the other mentality that drives spending can be this idea of: “Well, you can’t take it with you, so why not? Yolo!” There has to be a delicate balance between this approach compared to being so penny pinching that you stress over every dollar you spend.
I think the other important point is that as a single mother physician, my ex-husband used to take care of all the finances and now I have a steep learning curve. Women need to increase their financial literacy. Thank goodness my husband at the time was able to get us very well setup for retirement and now I see that the different between starting to save in the first 10 years out of residency, and all that painful moonlighting, etc. is paying off now.
The other point that I completely connected with was that we get so out of touch with middle class. We used to have all doctor family friends who would spend like crazy, and your viewpoint gets very skewed. My boyfriend now is an engineer who does make in the lower 6 digits, but is extremely frugal and thoughtful about his money which has changed my perspective. A lot of my friends from before and their lifestyle are very hard to understand now, like, what, you spent $3000 on tickets to Hamilton?? Ok, I know, Hamilton is pretty amazing.
Thanks again for this very useful post!!!
Jennifer
Funny you mention Hamilton. I’m seeing it tomorrow with my daughter, wife, and niece. Suffice to say I didn’t pay $3K for tickets. I think they were <$100 a piece, but they're nosebleeds. Not quite the 7th row tickets I bought 2 minutes before the show started a few years ago before Hamilton was even ON Broadway. I'm not throwing away my shot.
Great list. I see this all the time. This is a good list to give to my one-on-one coaching clients as they almost always need this advice first. When they call me for help, the problem is never because they don’t earn enough money. In fact, they almost always earn more than I ever did in the best earning year of my life. We all need to learn to spend less.
Dr. Cory S. Fawcett
Prescription for Financial Success
Awesome post. Really concise but insightful. #10 sure puts things in perspective!
Very well written. We have 20 to 30 med students over for dinner two or three times a year. They aren’t usually interested in money discussions. Still focused on learning strategies, electives and residency options and some in talking about work-life balance and relationships. Any that are interested I try to stress the very basic key points and direct to good resources. I find that residents are more interested in discussions about practice management and finance. Our undergraduate programme does a series on financial literacy which is quite reasonable although at times I wish it would be a bit more in your face about many of the issues facing the med students and residents – including those outlined in this excellent article. Great work!
Love number 10..I need to work on it.
1 where to get disability with a chronic dx that has a ‘normal’ life span? Tried 5 yr ago they said no way, guess they didnt read the nejm that gave it normal LE.
2 do you believe in spendthrift trusts etc as asset protection? You are technically giving the money away but you can still use it for yourself. I have most in taxable, not my fault.
3 I’m starting another practice with expensive equip in tax free NV. Is an LLC, s or c best? Should I have an LLC for equipment leasing it to one for the practice or some other strategy?
Thanks so much. We are now in different brackets but were parallel for a decade there lol. Lucky dog.
1. Have an independent agent shop it around. Things do change from time to time.
2. Sure, they work. Why not if you also want a spendthrift trust?
3. Not enough info to give advice there. Some docs have found having a separate business entity lease the equipment to the practice to be useful for both business purposes and for asset protection to be a useful idea. In general, most practices are LLCs, either filing as a sole proprietor/partnership or an S Corp.
1- your statement argues for a normal cost LIFE insurance policy. Do you mean the ailment has no increased rate of disability? They probably find or think if you’ve got one you might get another.
thanks folks..
I think disability is higher for most any chronic disease. This one was considered deadly few decades ago which is the issue I assume. Life expectancy is usually not diminished much modernly, less than 1%. Probably beats obesity or diabetes but they are insurable.
As for life insurance, wow, not thought about it much since my savings are my policy of sorts.
I have both DA and Life through a job, but I hate those things and want my own practice again now.
Cultural expectations probably count more than all ten combined. You could easily replace the word “doctor” with “American” in the post title and keep almost everything else unchanged. Spending less of your paycheck each month is “un-American”. 😉
Seriously, savings and debt rates are very different for Asian families and got me wondering whether you’ve seen a difference in spending philosophy with Asian docs vs. American docs? Or it is similar to immigrants who adopt American eating styles after living here for awhile?
Yes. Whenever I run into a doc maxing out Roth IRAs and 401(k)s on a single resident income, it seems it is usually/often an Asian-American, (usually 2nd generation.) Remember Dr. Wise Money? Good example.
Agreed. In addition to Dr. Wise Money, these personal finance bloggers are Asian-American doctors: Future Proof MD, Miss Bonnie MD, Senior Resident. There are more to this list but they blog anonymously.
Yes, but the only one that was emailing me after maxing out a 401(k) and a Backdoor Roth IRA asking where to invest even more as a resident was DWM! She had a Roth IRA going for her kid too! RIP.
Last sentence of the post – great words to live by, from a financial perspective or otherwise, “You can never get enough of what you don’t need.”
WCI what is
Something to do and something to look forward for you?
I have no shortage of stuff to do that I see as meaningful. Right now I’m looking forward to exploring a new slot canyon with my kids and their friends this Saturday.
I made so much more money as a resident, compared to my family growing up, I learned to live comfortably on it. So when I started earning big bucks, it all went to retire/saving. Staying single helped. Good Post.
My rich er I mean jobless frugal brother was visiting us in England (US Army). My kid said “Daddy why can’t you stay home more with us like Uncle Joe?” Dad replied “Because I got married and had two kids!”
Well done.
Yes excess spending is THE problem with physicians.
The more we can understand the reasons for this and how to modify this behavior, the more we can help our colleagues.
I’ve seen the lifestyle explosion with a lot of doctors. My neighbor bought 2 Mercedes once he got his license, but it didn’t improve his lifestyle by much. The guy buys a new car every 2 years.
Thank you Jim as always for the great article. Appreciate WCI forum every day.
Agree with your points, glad I have healed myself of a few, thanks partly to this blog.
Regarding point 10: Not sure you can fit what makes all people happy into 3 bullet points. Entire academic careers and a field of psychology are devoted to the topic. Glad it works for you though.
You are correct on a meta- level, of course, but I love those three simple bullet points!
Most of us are too wrapped up in our daily grind to think much about what keeps us in a “happy” frame of mind. However, I will keep those three things in mind as I think about transitioning to the next phase, i.e., part time.
Congrats on the part time. The larger point I was making without distracting from the post (too late now unless I get moderated….again) was that Physicians should put effort into well-being. We should learn about it in school and training. We should read, blog, comment, teach, talk and live it.
What you say is true, the daily grind keeps us from addressing our our wellbeing and that of our colleagues, to the detriment of ourselves, family, patients and medicine. That needs to change. It’s a budding passion of mine, as you see. Stepping off soapbox now.
Wow! Didn’t expect criticism on that point. Perhaps you could list another 30 for readers form your review of the field of psychology. 🙂
I’m no expert, just making the point that its personal and maybe not as easy to encapsulate in a blog post bullet point as the other 9 points. You do say “three things we need to be happy” and I just think that is a bold statement in general if by “we” you mean your readers. If you mean your family/you etc then I get it. The other points are more or less objective (and comprehensive) – spend less, make more, save more. Point 10 is objective until the end of the first paragraph.
Not shaking your peach tree, just saying that money and happiness is more nuanced and complicated than the other points. Simple is better, 3 beats 30 anyway : )
It’s not even my quote I don’t think. I’m pretty sure I’ve seen it somewhere else, but I think it encapsulates a lot of truth, even if it isn’t comprehensive.
I think that number 2 and likely number 3 are part of the Japanese ‘ikigai’ – a reason to be. Having a purpose in life is a very powerful reason to be happy. Whether point 1 is ‘someone to love’ or ‘someone to love you’ I am not sure – arguably they might be equivalent. Enjoyed the post.
Never heard of Ikigai. I looked it up. Fascinating…. the Venn diagram for the meaning of life. Thanks for that.