By Dr. Jim Dahle, WCI Founder
Once every couple of years, I have 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 move on to something else. They always think it's funny when I say, “If you can't live on $200,000, 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 $200,000.
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? 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 No. 1 is we deferred gratification for so long. 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 the time to buy a bunch of stuff you've been putting off for pretty much forever.
#2 Lack of Understanding of Our Progressive Tax Code
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 to the tax bill, and all of a sudden, their increased spending potential is really only 50%-100%.
More information here:
How Much This FI Physician Family Actually Spends in a Year
#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 some of the poorest people on the planet. Their parents, siblings, spouses, 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 they may feel some pressure to keep up with the Joneses with regard 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 heads 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 have the ability to work (although the COVID economic downturn gave many their first experience with a massive drop in income). They have staked their entire financial plan on working 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 the 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. 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.
More information here:
#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 $23,000 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, just 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 50,000 miles on them aren't reliable. Or that a $20,000 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 Walmart. 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 schools, but if you ask doctors or their spouses, apparently 95% of the country has terrible public schools. 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 get by on less than that.
#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.
More information here:
Here’s How Much Money People Think They’ll Need to Retire – And Why Some Will Need to Work Forever
#9 Don't Understand That Doctors Aren't All the Same
Sometimes doctors think that, just because they went to medical school with somebody, 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 ahead. 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. The 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
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. You can never get enough of what you don't need.
Did I miss any reasons why doctors spend too much money? Why do you think doctors do it? Do you spend too much money?
[This updated post was originally published in 2018.]
Excellent article!! My only critique is that it comes down hard on people who choose to sacrifice in other ways in order to send their kids to private school. Yes there are plenty of communities with great public schools, but for those of us who choose to live in a city (and no, I’m not referring to the Upper West Side or Palo Alto when I say “city”), our children might, and I emphasize might, be forced to attend public schools that we feel are mismanaged and/or unsafe. And when I say unsafe, I mean that people are checked for gang-signs after they pass through the metal detector on their way to class in the morning.
I hope you’re not advocating for all physicians to make the Hobson’s choice of either sending their kids to a public school that they consider to be unsafe or poorly run or moving to a community with a beautifully run public school system thanks to the sturdy tax base propping it up. Not saying that all public schools are bad or inferior to private schools, and there’s always the argument that sending one’s children to a disadvantaged public school is good for them and the school, but for many of us, private schooling is a reasonable choice rather than a poorly considered decision made by a reckless physician spendthrift (and his or her spouse).
One last thing: One couldn’t swing a dead cat in my department without hitting someone who went to an ivy or other elite college. Yes, there are articles and studies galore documenting that sending one’s child to an Ivy League school doesn’t mean they’ll become happy, fulfilled, and wealthy. That said, let’s not pretend that it isn’t reasonable for a parent wanting the best for their child to worry that, just maybe, in 20 years or so there might still be program directors, department chairs, and hiring managers in other industries who, when faced with two equal candidates, will continue to favor those who attended “elite” schools.
You’re going to love two posts that are coming up later this year about private vs public schools.
If a school is truly unsafe, that’s one thing. But I’m pretty amazed to hear people say schools are crummy and unsafe when all objective evidence suggests they’re fine. It’s almost like it’s more of a status thing. The other thing is people rarely do the math. You’re not really choosing between public and private, assuming you can actually afford private. You’re choosing between public plus a completely funded retirement, and private. When you put it that way, a lot of us and our kids would probably choose the public plus retirement.
WCI…Do your kids go to private or public? (or something else?)
What else is there? Mine are in public schools, like their parents.
Home school.
My kids go to private school because my (dear, sweet) Catholic hubby wanted the kids to attend Catholic school. Totally worth the money. The middle schoolers at my kids’ school get into trouble for erasing a snowman drawing off a whiteboard (ok, that was my son…) or putting Goldfish crackers in their milk at lunch. The public school has middle schoolers allegedly raping others in the bathrooms. Suburban Indy. I’m general Peds (and public school educated)… but I see it all. And I still save a ton and have a stay at home spouse.
If you choose to send your child to a pre-school that costs as much as college tuition, so he can learn what sound a truck makes, are you really getting your money’s worth out of that? You would be far better to put the money into a college savings fund and send them to public school in k-12 and have them use the money to graduate from college and/or medical school debt free. Too many people send their children to private school and can’t afford to do so, often leaning on a grandparent to pay the tuition.
An exception is preschool in a daycare setting when childcare hours are needed. That can be very expensive depending on location. But then cost usually goes way down with public kindergarten, but not always as may need to piece together before and aftercare. Some school districts offer much cheaper care than others
But I get a video of my 21 month old singing songs… Can you put a price tag on that?
Jokes aside – while 3k a month is obscene for daycare, day-time nanny-care costs the same, and for my wife and I who are both EM physicians we need both flexibility and availability. Even the low-end “schools” cost 2k+/month.
A au pair is cheaper, but I dont want someone living in my house.
Young physicians need to keep in mind the larger picture, which is that healthcare as a whole has a major cost problem. Due to forces beyond our control, we are likely to see average physician incomes across all specialties continue to be forced downward significantly over the course of our careers. In my specialty, average annual incomes 30 years ago (adjusted for inflation) were over $70k higher than they are now, in today’s dollars. Physicians who rely on third party payors have zero control over what we get paid for our work, and our corporate and government overlords are continually trying to find ways to decrease healthcare costs at the point of care. The possibility that we may see some form of single payer system implemented in the not-too-distant future is a real one. In that scenario, it’s not unrealistic to think that physician incomes could be cut suddenly and severely. Bottom line- the smartest thing you can do now is live as frugally as possible, pay off your debts ASAP, save and invest everything you can, and be prepared for rainy days ahead, because they’re coming.
COMPLETELY AGREE. The bottom will be falling out – sooner than we think!! Save. Invest. Find an alternative source of income. Because the gravy train is going to stop SOON.
Pessimistic, but not unreasonable. Certainly many specialties have lower incomes now, at least on an inflation adjusted basis, than a decade ago. That said, some specialties are better off now. EM is one of them. In fact, I think this is probably the “golden age” of EM. But it couldn’t certainly drop in the future. Wouldn’t even surprise me really.
And as is said 😉 of climate change, worst case scenario of expecting a drop in income is well or overly funded retirement accounts. We FIREd after starting our careers (back before WCI was even a twinkle in Jim’s eye) expecting socialized medicine to arrive soon, maybe making school teacher a more enjoyable but just as lucrative a career. I planned our retirement savings to protect from that with, as it turns out, being over funded 15 years ahead of time. Helped to know as military FPs we’d never have private plastic surgeon money.
Plus NPs are coming for our jobs as well. So a pay cut may be the best case scenario….job loss isn’t out of the question! (No joke). On the flip side, I doubt we will make less than those in Europe, and if that is the case, none of us should starve.
FYI I made more working for the NHS (after hours work actually) in England than I have in the US (salaried). Actually only market based doctors pay I ever received. Refused too low a premium for eg holiday shifts and the offered price rose until someone was willing to accept it (thank goodness I had a driver given that the price rose enough I did a few 36 hour stints one winter break).
This is a great and super true post!
-Societal/cultural pressure is BIG, and can be tough to negotiate. I found this particularly challenging at the start of practice when you’re worth the least but “so over” being super poor. This took me some time to get over, but now I’m happy “thinking like an engineer” in terms of my wealth.
-Another point that you could add (but would probably get a lot of backlash for): us doctors usually have big egos…. aaaand might have a hard time taking constructive criticism, especially when we are “so over” being criticized through med school and residency. 🙂
Biggest reason for overspending is Dr’s are focused too much on the opportunity cost! They could be big spenders if they’d gone into many other different career paths. It’s not wrong to live a lifestyle you deserve when you do deserve it, and many others have it simply because they chose an easier path. Many Dr’s understand this b/c they chose their profession knowing what else is out there; many pursue medicine b/c it seems great without understanding really all the opportunities that exist out there.. America is full of big money and you shouldn’t have to suffer for pursuing medicine. But you do!
So there’s a lot of apathy from the Dr’s well all need towards the people with more money and easier careers. SOO then those people have a lot of apathy towards Dr’s b/c they think just by choosing medicine, you should automatically give up expecting a good life. (very flawed and insecure logic there.) OFC that only lasts until the haul Dr’s make per hour outweighs the ceilings most of those other people will hit (given they have a good specialty and well run private practice. the GI in Arkansas making much more than the Wharton MBA in NYC; the surgeon making half the dude with only a bachelors. the TechBro that has spent his nights since he graduated highs-school having fun and sex with supportive friends vs. the Doc who hasn’t had much life to live, well, absolutely ever (HS –> college –> gap yr + med school –> residency –> family –> retirement. VS college –> hype life –> nanny takes care of kids and retires at 45.
I was totally primed to fall into each of these traps towards the end of my training. 100% felt like I finally deserved some reward from years of deferred gratification and felt the external pressure to lead a material life that fit with the picture of a plastic surgeon. It’s amazing how it all changes when you adjust your mindset and realize that most of these pitfalls are internal.
You are so spot on about #10. I was planning to lease a higher end car because well, that’s what you do. But I’m not even much of a car person and I don’t actually derive a lot of happiness from my car. So I instead bought a perfectly good used car for a fraction of its value in cash and now can save & invest that monthly lease payment. So important to identify what gives you happiness and focus on that.
I’d put lack of financial literacy as the single most important factor. Fresh out of training, I had no idea how much of a retirement nest egg we needed and how to get there- as in, doing the math. I was hungry to know more, but every time I asked someone, all they said was, “Don’t worry, you’ll be okay”.
I feel that with some financial knowledge under your belt, you can moderate all the other factors better.
Love love the quote at the end on happiness,
PFB
Great article. I think a lot of it is how you were raised; I never had any sort of expectation or goal of wealth or FI after finishing training, but the few times money was tight I felt very uncomfortable. My folks always bought inexpensive cars, and never went to fancy restaurants, and avoided luxuries – they viewed those as for “showy” people. So after training, we bought a house at 1x income, “paid ourselves first” with maxing out retirement accounts, and thousands a month with direct transfer from checking to a taxable brokerage, along with 529’s for kids. Public schools, one spouse, one house, etc. With many years of doing that, now coasting and no financial worries.
A minor push back on No 7. I am single and saving aggressively toward retirement. I make purposeful decisions with the money spend. My grandparents were teachers and firemen. I feel well rooted in my middle class upbringing. Something to splurge is travel, and I have added two rules that make me irrationally happy. No need to fly someplace that is cold. I hate the cold. Someone will say there is a great meeting in Toronto in February or let’s go on a ski trip to where ever… No thanks and no regrets. The other is if the flight is more than 4 hours or so, is a pass unless I can be in business class. If I don’t have the mile for the upgrade, or the cost is too high, that helps me figure out if it is really worth it. At a certain point the knees really hate being couped up in limited leg room, and the recovery time is a day each way from a long flight. Again it is a purposeful expense that is worth it to me, not $$$ flying out the door without a return.
As for education this blog should be required to finis residency. I have to give regular lectures to the residents and fellows. We routinely talk about the science in my surgical specialty, but not at all about money. At the end of the sessions I like to add 5-10 minutes on a topic these guys are woefully uneducated about – for example disability insurance or last weeks discussion of the traditional v Roth IRA. I hope that these young docs will be able to avoid the traps of 1-10.
Thanks for doing that.
I think the pent up demand is a huge driver. Waiting until so late in life compared to peers to start making money can lead to rapid lifestyle inflation in some. On the other hand, it should teach you to live below your means.
It is disappointing that people spend so much money on things of little value. I see then assuming that if something is expensive then it must be rewarding to own or do. Maybe it is just expensive, with no redeeming values.
When I got my first real job we bought a house in a decidedly middle class neighborhood. Our neighbors were much more likely to be school teachers than doctors. Our real estate agent was so disappointed and assured us we would be back on the market for a doctor’s house in a few years.
We stayed there for 18 years, until I took a job in another state. Consciously avoid expensive tastes, travel and purchases. I don’t want the expensive things I see others buy, so it is easy to avoid wasting the money
For those who have an endless list of things they want to buy, saving is hard. I feel for them.
Random aside, but I am always amused by this response from some folks in “white coat” world: “$300k salary (or even higher) just isn’t that much to live on anymore.”
I’m all for doctors negotiating and earning more, but take a look at US data and surely you realize that’s such an absurd, disconnected thing to say!
Totally agree.
Please stop disparaging those who wish to save their children from the indignity of public school. Where you live in Utah is an anomaly. Your children go to school with other children from your church and the teachers aren’t trying to turn them into another gender. We all don’t have the luxury that you have.
I suspect you are detached from the middle class at this point. The middle class in Sacramento, CA is over-weight, divorced, has children out of wedlock, takes Tylenol every day, smokes weed everyday, and is not allowed to date my daughter.
This has to be the funniest comment I’ve seen here. As a native of Rio Linda, the town Rush Limbaugh built his show on disparaging: I AGREE.
I know very little about the public schools in Sacramento. You may be entirely right. Add that as one more reason not to live/practice in CA–lower pay, higher cost of living, higher taxes, and you have to pay for private school.
FWIW- I did not go to public school in Utah. According to “Great Schools” my high school gets a 6/10 on test scores and 4/10 on equity. While I don’t recall any teachers trying to change my gender, I only recall one teacher at my school who went to church with me. Maybe I’d be a better person if I had gone to the local Christian schools, but it wasn’t even an option for my family because we couldn’t afford it. If your family can afford private school in your area and can still meet its other financial goals, it seems like a worthy thing to at least consider. But if you can’t, maybe consider that choice of school might not matter as much as the private school industry would like you to believe.
Interesting post. I think a good follow up would be how to protect yourself from these risks (which you already have done many times in various forms).
I know for me, growing up at best average middle class (A monthly dinner at Red lobster was the splurge) helped. I’ll still waste time to save $10 (I’m working on it). If anything, in hindsight ,I could have bought a nicer house, and taken nicer vacations.
It also helped that we didn’t really end up in the doctor friend circle. And we sent our kids to public schools. My youngest son had a best friend that had never seen the ocean at age 19. It’s 150 miles away. You can’t teach that lesson.
None of them currently make 1/3 of what I did. But they are doing great. (To be fair, we have helped with college, down payments, and family beach trips).
If anyone half listens to you, after 20 years of living very nicely, but not extravagantly, they will be FI.
Doesn’t mean your need to stop. But it’s nice when you can decide which rules you want to live by.
Monthly red lobster would have been a huge step up from my upbringing. More like annual McDonalds.
I truly wish that someone gave a lecture to me like this as a young attending. I would not have seen it as preachy but maybe some docs would. One of the other blogs had a line that I will never forget that fits in here well:
“Don’t waste money you don’t have on things you don’t want to impress people you don’t like. ”
I think i will print that and put it on the wall of my study.
Thanks for yet another great article!