A reader recently sent me a link to “Never Live Like a Resident” by Wealthy Doc. I have great respect for Wealthy Doc so none of this piece is personal, but I do feel like a bit of a defense is in order here. His counterargument is so full of strawmen that it won't take long to set the whole thing on FIRE.
I don't claim to have invented the phrase “Live Like a Resident,” but I may be more responsible than anybody else for popularizing the concept. Before we get to the strawmen, let's talk about Live Like a Resident (LLAR) for a while. Plenty of people don't actually understand what I mean when I say LLAR.
It's Your Money, Do What You Want
First of all, remember that it's your money. Do whatever you want with it. If you want to spend it all until you're 50 and then put everything you save into the latest meme stocks, that's fine. I don't think that's a particularly wise approach, but this is all up to you. Whether you LLAR or not, what that means to you, and how long you do it is all your decision. You don't need my permission or anyone else's (well, maybe your partner's) to earn, save, invest, spend, and give in any way you want.
Don't Live Like a Resident Forever
The idea behind LLAR is to front-load a bunch of the financial work in your lifetime. It is not to live a lifetime of poverty, frugality, and misery. In fact, it's to keep you from doing that by nearly guaranteeing financial success. The idea is that you keep your lifestyle somewhat similar to what you could afford as a resident for a short period at the beginning of your attending career (or its equivalent in other professions).
For a typical physician, a 2-5 year period is plenty. If you will earn like an attending and spend like a resident, you should pay off your student loans within 2-5 years, save up a down payment on a “doctor home,” and catch up to your college roommates with regard to retirement savings. At that point, I recommend you grow into about 80% of your income (you'll need to continue to save something like 20% for retirement) and then thoroughly enjoy spending 80% of a doctor's income. Yes, I know something like 30% is going to go to taxes and you can never really spend more than about 50% of a doctor's gross income, but you know what I mean.
If you're coming out of residency at 30, you'll be done living like a resident by 32-35. Assuming any sort of normal life expectancy, you haven't missed out on anything. You're young, hopefully healthy, back to a positive net worth, and in command of a high income. Life is going to be very good for you.
More information here:
A Financial Love Letter to My Wife (and the Realities of Living Like a Resident)
Who Doesn’t Have to Live Like a Resident?
Nobody Actually Lives Exactly Like a Resident
This is a theory, a concept. It's not some sort of exact prescription. The idea is that you don't grow into your newfound high income all at once. When I speak to groups of doctors, I tell them, “Look, forget it. You don't have to live like a resident. Give yourself a 50% raise. That would be huge in corporate America!”
Incidentally, a resident's salary is about the average household income in America. It's hardly a sentence of poverty. Residents are making something like $70,000 these days, and if you let yourself spend 50% more than that, it's a six-figure amount. We're not talking about donating plasma for grocery money. Yes, I've done that (as a very broke undergrad), and no, I don't think anybody needs to do that as an attending.
The Numbers
How does this work exactly? Let's say you finish residency owing $250,000 in student loans and have a new income of $400,000. You decide that your idea of “living like a resident” is to live on about $100,000 for three years. Where do you stand after three years? You're going to pay about $100,000 in taxes, and you're going to spend $100,000. That leaves $200,000 a year with which to build wealth. You want to be done with the student loans in three years, so you refinance them to 5% and calculate that you'll need to pay about $92,000 a year toward them.
=PMT(5%,3,-250000,0) = $91,800
That leaves $108,000. You plan to save 20% of your gross ($80,000) for retirement after your LLAR period, so you figure you might as well get started. You manage to earn 8% a year on that $80,000. After three years, your nest egg is:
=FV(8%,3,-80000) = $260,000
What will you do with the other $28,000 a year? How about a down payment on a house? After a year, you figure the job likes you, and you like the job. Your down payment fund now has $30,000 or so in it. That's not enough for a 20% down payment on the $800,000 house you want, but it does cover your closing costs on a doctor mortgage. The house appreciates over the next two years, you pay a little of the mortgage down, and you find you now have $80,000 in home equity three years out of training.
So, over the course of your three-year LLAR period, your net worth has gone from -$250,000 to a +$340,000—a $590,000 swing or about $200,000 a year. Not too shabby. You're now set up to have a financially awesome life. What did it cost you? Oh, you had to live just like many other American families despite the fact that it's just you, your partner, and now a 2-year-old. What a sacrifice, right?
More information here:
Saving for Your Future Stranger
Killing the Strawmen
OK, now let's tackle some of the strawmen from “Never Live Like a Resident.”
Draconian Frugality
Wealthy Doc writes:
You can reach robust financial outcomes without years of draconian frugality. Instead of pinching every penny . . . Living on a resident’s salary can lead to a minimal lifestyle, even if you’re saving aggressively. It means forgoing experiences, quality meals, and travel. This can create resentment and a sense of deprivation that can affect mental health . . . ‘Live like a resident' has become shorthand for putting aside even the smallest luxuries, knowing that every dollar saved will eventually compound into significant wealth. However, this mindset often overlooks such sacrifice’s emotional and psychological toll. For many physicians, the burden of financial austerity can exacerbate stress. Deprivation can feel unhealthy.
I think we've already crushed this stupid criticism of LLAR above. If living like tons of American families is “draconian” and “pinching every penny” and “putting aside even the smallest luxuries” and “financial austerity,” you are so out of touch with your fellow Americans that maybe you deserve to feel the financial struggles. Remember that 25% of physicians in their 60s are not millionaires, and 11%-12% have a net worth of < $500,000. I bet someone told them they didn't have to “pinch any pennies.” Well, it turns out they actually did have to avoid spending their entire income to avoid that outcome.
Consumption Smoothing Is Behaviorally Stupid
“Never Live Like a Resident” spends a great deal of time arguing for a strategy of “consumption smoothing.” The idea behind consumption smoothing is that you can spend the same amount of money every year of your life. You borrow that money in the beginning, and then as your income goes up, you start paying back that debt with your now higher income. It looks all pretty and fine in the mathematical models and academic papers that illustrate it.
The problem? This is the real world. You're not homo economicus. You're a real live human being. It turns out that we don't WANT to spend the same amount of money every year for our entire life. We WANT to spend MORE each year than the year before, and we NEVER want to go down in spending. The happiness literature is pretty clear that a constantly rising standard of living will produce more happiness in your life. How can a doctor do that? By intentionally spending less than they could have spent in the beginning. That sure sounds a lot like LLAR, doesn't it? This is hardly a doctor-specific thing either.
Check out this advice from a professional athlete to his peers. Start at about 6:20.
“That next year after you get that first big contract, live that same life as you lived on the rookie deal for at least a year.”
Couldn't have said it better myself.
Aside from the desire for an increasing standard of living, people just don't manage debt well. Graduating doctors are already WAY more comfortable with debt than they should be. Encouraging them to become even more comfortable with it is not doing them any favors. Many of them will mismanage the debt and find themselves burned out at mid-career and wanting to cut back. But they can't because they've still got student loans, multiple car loans, a mortgage, and a HELOC to manage. Even my elementary schooler knows it's better to earn interest than pay interest.
Don't assume you'll have the same income throughout your career, either. Most docs find themselves wanting or needing to cut back in their 40s and 50s. Burnout rates range from 37%-63% depending on your specialty. Front-loading your financial work by LLAR allows you to implement burnout-crushing measures.
Wealthy Doc writes:
Gradual Adjustment of Lifestyle: By living above your means initially and tapering spending later, you create a lifestyle that adjusts to your changing income. This gradual easing of restrictions—rather than a sudden, prolonged period of self-denial—can help preserve your mental health and overall happiness.
You want a gradual easing of restrictions? Well, you'd better start with some restrictions then. And I'm not sure how LLAR results in a “sudden” period of self-denial. All you're doing is living like you have been for the last 3-5 years. In fact, you're probably a little better if you're like most of us here in the real world. And since it's only 2-5 years of LLAR, it's not a “prolonged” period. For most docs, it's probably less time than they spent in residency. But the length is fully under their control. If they want to adjust it, they can adjust it. Bump spending up a bit after a year or two. Shorten the period by six months or a year when they realize they are ahead of where they wanted to be.
Personal Finance Is a Single-Player Game
Wealthy Doc writes:
Peer Benchmarking and Relative Success: One of the lesser-discussed aspects of consumption is social comparison. Physicians often gauge their success relative to their peers. A plan that involves moderate consumption increases can help you feel that you are keeping pace with your colleagues. This relative success can motivate you to continue saving and investing.
The sooner you learn that money is a single-player game, the happier you're going to be. If you gauge your success relative to your peers, you're going to have a miserable life. There will ALWAYS be someone who has more, spends more, or seems to be having more fun than you. Deal with it. Don't feel like you should even try to keep up with them. In a few decades, you're going to realize they are the docs in their 60s who can't afford to retire.
Besides, lots of docs make more than you do. The pediatricians envy the emergency docs who envy the cardiologists who envy the plastic surgeons who envy the back surgeons who envy the finance guys who envy the successful entrepreneurs. Yeah, that sounds like a happy workforce. We're humans. We don't compare ourselves to our peers. We always compare up, and it makes us feel bad. Teddy Roosevelt was right when he said, “Comparison is the thief of joy.” Stop comparing.
More information here:
From Broke to Multi-Deca-Millionaire – Lessons Learned from 42 Years of Investing
Some Surprising Things I’ve Learned in 20 Years of Investing
Wealthy Doc Thinks You Should Live Like a Resident, Too
After hundreds of words bashing on the concept of LLAR, Wealthy Doc pulls out an example of what he thinks you should do. It looks like this:
Let’s take an example of a physician who is 27 years old and starting residency. They will make $60,000 plus a 3% COLA for their four-year residency. During residency, they plan to live on $75,000 annually (a little beyond their means). After residency, they must repay their $200,000 (6%) loans. They will start at age 31, making $300,000 per year. They pay a 6% state income tax and an effective federal tax of 18%. Going forward, they will average a 3% annual raise and a 5% annual bonus. They will spend $90,000 for the first year and then increase to $120,000 annually for five years. Then $160,000 for five years, then $180,000 going forward.
Aside from borrowing a bunch more money in residency (which many docs do anyway with a car loan), the rest of it sure sounds an awful lot like what I just told you to do above, no? You're making $300,000 and spending $90,000-$120,000 for six years and then growing into spending 60% of your gross income as slowly as you can stand it. Same same.
For all that talk, the prescription is the same in the end. He just calls it “Never Live Like A Resident” instead of “Live Like a Resident.”
What do you think? Did you LLAR? What did it look like in your case, and how has it worked out?