By Dr. Jim Dahle, WCI Founder
I was chatting recently with two financial advisors who work exclusively with doctors, and we were comparing stories of physicians who are in serious financial trouble when I realized something. Most of them come to an advisor (or, in my case, a blogger) with the same question.
“How should I decide whether to invest or pay down debt?”
On the surface, the question is perfectly fine. In fact, it is one I have spent a great deal of time answering over the years. Here are some examples:
- Pay Off Debt or Invest
- Should I Pay Off Student Loans or Invest?
- Pay Off Debt or Invest Podcast — # 235
- The Wrong Way to Think About Debt
- How to Leverage Debt — Best Ways to Use Debt to Your Advantage
- How Fast Can You Get Out of Debt
- Bitcoin, Prenups, and Investing vs. Paying Off Debt Podcast — # 38
- Debt Is a Negative Bond
- How to Think About Debt
- What's Your Investment to Debt Ratio?
- 10 Reasons You Should Pay Off Student Loans Quickly
- 401(k) vs. Student Loans Decision
- Balancing Your Financial Goals
See what I mean? We spend a lot of time on this. In fact, pretty much everyone deals with this dilemma at some point—at least until one becomes completely debt-free.
However, we thought it was particularly revealing that THIS was the question that caused doctors in dire financial straits to seek assistance.
The Santa Barbara Student Loan Plan
Jokingly, we referred to this sort of doctor as somebody who's on the Santa Barbara Student Loan Plan. I've written before that doctors generally make enough money that they can make a serious “mistake” or two; they just can't make all the “mistakes.”
By this, we mean that a doctor can buy an expensive car on payments and still be OK. Or they can spend a little too much on a house, and it all still works out. Or they can pay for an expensive medical school all with student loans. Or they can take a job that pays much less than average. Or they can move to a state that has a high cost of living and a high tax burden. Or they can have some dumb investments. Or they can pay too much to a financial advisor for bad advice. Or they can mismanage student loans.
But a doctor can't do all of that and still expect to be OK. Doctor incomes are high, but they're not THAT high.
What happens is that doctors get on the Santa Barbara Student Loan Plan. These doctors have a bunch of student loans and have taken a below-average job in Santa Barbara (or Manhattan or Boston or whatever other high cost of living/high-tax/oversaturated area you choose) and bought a house with a big fat mortgage with nothing down. After two or three months, they realize they're living paycheck to paycheck or worse. Maybe they've got a little extra money left over every month. Say, it's $1,500. Then, they come to an advisor (or blogger) and ask whether that $1,500 would be better off going toward their $450,000 in student loans or into their four-figure 401(k).
More information here:
The Question They Should Have Asked
These well-meaning advisors delve into the complexities of the question (like the posts linked above), but the reality is that this is all, quite frankly, a waste of time. The advisor gets paid, and technically they give good advice and answer the question that was asked. But the truth is that these docs don't need that question answered. What they need is a (metaphorical) 2 x 4 upside the head. It doesn't matter whether that $1,500 a month goes toward debt or investing, because they're still going to lose this game. They're not making the winning moves, and they're running out of time. The real question they should be asking is:
“How hardcore do I need to get about this finance stuff if I'm going to reach some reasonable financial goals during my lifetime?”
By the time you're reading this, I'll be 48 years old. Depending on when you say I started my career (24 upon entering medical school, 28 upon finishing, 31 when I left residency, 35 when I got my first doctor job that paid more than a pharmacist), I'm more than halfway through my career. If a traditional career ends at 65 and I started at 28, I'm now 20 years in with only 17 left to go. Wow! That went by really fast. If I want out at 55, I'm now three-quarters of the way through.
I'm starting to need reading glasses—at least for the first 15 minutes after I get out of bed—when the lighting isn't so good or when I need to suture. My back hurts more days than it doesn't. My health insurer keeps scolding me to come in for a colonoscopy. This career doesn't last forever. Heck, many of you have been with me for most of it as I was still in my mid-30s when I started blogging about this finance stuff.
My point is that you don't have time to dink around for the first decade or two. You can't be spending 15 years paying off student loans and 30 years paying off mortgages and only saving $1,500 a month for retirement. You've got to make hay while the sun shines. And that's for those who are content to work well into their 60s. If you want to punch out in your 50s (or earlier) like most people I talk to, you'd better start moving.
More information here:
Making Drastic Changes
A realistic assessment of where you're sitting with regard to your goals and whether following your current course is likely to get you there is critical. So, run the numbers. If you aren't confident in your own ability to do so, take our online Fire Your Financial Advisor course. Still not confident? Then, hire a good financial planner to help you put together a plan. But don't go to them trying to figure out what to do with that $1,500. It doesn't matter what you do with it, because you need to do something else. Probably several “something else”s if you want to get where you're going. You probably need to do one (or more likely, two or three) of the following:
- Moving to another state
- Moving to a smaller town
- Selling both of your cars and buying a beater or two
- Moving those kids out of private school and start talking up the merits of State U
- Getting a real student loan plan (that probably involves someone else paying off most of your loans)
- Getting a new job
- Opening or buying into a practice
- Ditching your mom's friend from college and finding a real advisor who offers good advice at a fair price
- Making a real budget and actually figuring out where all your money is going
- Starting a side gig running a short-term rental business
Surveys show that 11%-12% of doctors in their 60s have a net worth under $500,000, and 25% are not yet millionaires. Everyone has unique circumstances, and bad things (divorce, disability, etc.) can happen. But arriving at that point after 20-30+ years of doctor-level paychecks with less than a million bucks is what failure looks like when it comes to this financial game we're all playing. You've been paid $5 million-$15 million dollars over the course of your career, and you don't even have a million of it left? Really?
It's time to get serious about building wealth. If you find yourself asking, “Should I Pay Off Debt or Invest?” see if you can figure out a way to do both—and quickly. Get off the Santa Barbara Student Loan Plan, and let's get moving.
What do you think? Why do so many doctors get stuck in a financial rut that isn't going to take them where they want to go? Have you been on the Santa Barbara Student Loan Plan? What did you do to get off it? Comment below!