I blogged recently about what really matters when it comes to reaching your financial goals. I'd like to expand on a portion of that today. When I go to speaking engagements, I often include a slide entitled “How to Get Rich.” There are four steps on it:
- Make a lot of money
- Don't spend a lot of money
- Make your money work as hard as you do
- Don't lose your money (to creditors, disability, death etc.)
It is a very simple slide and the point of it is that getting rich is relatively simple, even if it isn't easy. The key for most high-income professionals is to convert their high income into a high net worth. That is a little tricky for most, not only because they generally start with a negative net worth, but also because of the intense demands to spend and “act like a rich doctor” from their friends, co-workers, family, partner and even themselves. A few also get caught up in the resident to attending transition. Their gross income increased by five times and they assumed their spending could increase five times, when in reality, it could really only triple due to the progressive nature of the tax code, the need to start making student loan payments, and the need to start getting serious about retirement and college planning. (If they're smart, they kept their lifestyle increase to double or less by “Living Like a Resident.”)
I like to joke with listeners that they're “90% of the way there” by virtue of their high income, and they really need to just do the last 10%. But while playing a round of disc golf recently (if boating is my most expensive hobby, disc golf is probably the cheapest) I started thinking about percentages and what percentage of our financial success was really due to each of those four items on the slide. Here's what I think it would look like if we assigned percentages:
- High Income 45%
- High Savings Rate 30%
- Smart Investing and Tax Reduction Techniques 20%
- Smart Asset Protection and Insurance Plan 5%
Increase Your Income
There is no doubt whatsoever that a monstrously large reason for our success is our high income. There are innumerable blogs out there expounding on the virtues of getting on a budget and doing more with your current income. There is no doubt that is important. To borrow a football analogy, most championship teams benefit from an excellent defense, and you will need one too. However, it is very rare for me to hear about people talking about ways to increase their income. If you're sick of reusing ziplock bags and paper towels, perhaps it is time for you to spend a little more time on the offensive side of the equation. There are lots of different ways to increase income. However, the recipe for you is probably different than for anyone else, and perhaps that is why people spend so much time on the spending/budgeting side. Perhaps it would be easiest to use our own personal experience to demonstrate what we have done to increase income.
Getting Personal
Money matters, but not that much
Some might interpret this next section as a “humble-brag.” I don't mean for it to come across that way, but I am most knowledgeable about my own life, and there are a lot of techniques that we have used that you can probably use. There are certainly plenty of physicians who are wealthier than we are and even some who have higher incomes than we have. That doesn't bother me in the least, so I hope if your wealth or income happens to currently be lower than ours that it doesn't bother you either. Like any post on this blog or any other, take what is useful for you and leave the rest.
The traditional income path for a physician is to have a negative income through college and medical school, then the average American household income during residency, and then a big jump to an attending level income which remains somewhat level, sometimes increasing a bit or lowering a bit, until retirement. Our income path looks dramatically different. Part of that is on purpose, and part of it is a result of the method I used to pay for medical school. But whatever the reason, it has allowed us to have many smaller income jumps rather than the one big one that most doctors experience. We have been in pretty much every tax bracket, from the 10% to the 39.6%. This has been beneficial as it forced us to grow into an attending income slower than the typical doctor. Here's what our historical income chart looks like, going back as far as we have tax records for (back to 1998, the year before we got married.)
I've never compiled that data all in one place before, so it was pretty interesting for me to see. The main differences between our chart and that of most doctors is that we had an income in the med school years (working spouse and military stipend), the military years understate our income a little (1040 total income doesn't include TSP contributions, tax-exempt income, or allowances), and of course the rather significant WCI income the last 3 years. I was actually really surprised to see that our income dropped compared to the year before on five separate occasions-
- 1999- Started med school (worked less)
- 2001- Spouse went back to school
- 2005- Stay at home spouse
- 2007- Fictional drop due to deployment- lots of untaxed income that year
- 2011- In partnership track, mostly fictional due to a 2010 Roth conversion, but also worked less
However, the general trend is obviously impressively upward, and that is a result of a number of individual decisions we made as we went along (and probably a little luck.) Let's detail them:
15 Income Increasing Decisions We Made
As an undergraduate, I realized that not only was mowing lawns really boring and hard work, but that it didn't pay all that well either. I wanted something better (income increasing choice # 1).
So I started talking to people I knew (income increasing choice # 2) and learned about an opportunity to be a tour guide on a train in Alaska.
So I applied for that (income increasing choice # 3) and the next summer was earning $7.60 an hour (plus tips and lots of overtime) 14 hours a day instead of $7 an hour for 8 hours a day.
I then realized that I could use half of my days off to work overtime and signed up (income increasing choice # 4) for as many of those extra trips as I could.
At the end of the summer, I returned to school for my senior year. I had a nice MCAT score and so I leveraged that into a part-time teaching gig (income increasing choice # 5) for Kaplan's MCAT prep course.
Then I chose to apply for medical school (income increasing choice # 6), like many of you. While there was a huge up-front cost for this, I judged that it would be worth it given the increased income it would allow me to earn (plus I loved science and really wanted to help people just like the rest of you. Yes, I've read your med school application personal statements.)
My wife finished her undergraduate degree a few months after I started school, and began working full-time (income increasing choice # 7.) She worked for the next 4-5 years, even throughout her master's degree.
I also worked during my fourth year of medical school (income increasing choice # 8.) During my internship, we were DINKs, and it sure felt like we had money coming out of our ears. We paid off a small debt and started investing. At the end of that year, we had our first child, and a big drop in income as my wife stopped working to stay home with her. By that point, we were only two years out from “the big bucks,” so we thought that with a decent emergency fund, frugal living, and now with no debt to service, that we could weather it.
In my PGY3 year, I did a little bit of moonlighting (income increasing choice # 9.) Then, after graduation, it was time to pay back the military for all those tuition payments and living stipends. My starting salary was a little bit tricky to determine with all the various special pays and allowances, but it was basically $120,000. Again, we felt like we had money coming out of our ears. Not only did we buy a second cell phone, but we also bought a second car. A year into my commitment, I headed off for a deployment. We were getting pretty smart about financial stuff at this point, and by the time I came back (knowing I never wanted to do that again), it was pretty clear that one of the best things we could do for our finances was to trade my time for money at a higher rate in the civilian world.
So I started right away moonlighting (income increasing choice # 10) at a local trauma center. All of that money, and half of what the military was paying me, went toward investments and a growing down payment fund for our “dream home.” A year after that I had a nice little bump in pay for making major rank, and started looking for jobs for my impending separation. At that point, I'd worked in an urgent care, a small community ED, a big academic center, and an inner-city trauma center and I had a pretty good idea of what kind of a group I was looking for. I wanted to be an owner of my practice, despite the risk of a corporate takeover–a real risk for small democratic groups in emergency medicine.
So I only looked at small democratic groups (income increasing choice # 11.) While my immediate income was less than I could have commanded from a corporate group, that investment would eventually pay off, not only in a higher income, but also in a career where I had more control–boosting longevity. 9 months later, it looked like I was on track to make partner. I was becoming more and more interested in online entrepreneurship and real estate investing. So we did both. One obviously eventually worked out a lot better than the other, but that was not initially obvious.
I tried a few online physician surveys (that didn't work out well) and then eventually started The White Coat Investor in 2011 (income increasing choice # 12).
Meanwhile, I was plugging along at maximum pace to make partner as soon as possible (income increasing choice # 13.)
I made partner in 2012, and that came with a big boost in income, and by the end of 2013 it became clear that WCI had some potential. 2014 was the first time WCI made six figures, but I continued working full-time (income increasing choice # 14) because it was still quite clear that I could directly trade my time for money at a higher rate practicing medicine than doing anything else. By mid-2015, it seemed if I could dedicate a little more time to WCI we would soon start making money there than at the hospital. So I put in to reduce my hours, which didn't actually take place until September 2016. I say “we” because all along the way we had options for Mrs. WCI to head on back to paid work, but it simply didn't make financial sense for her to trade her time for money as a teacher when I could just pick up an extra shift or two and make as much as she would make in a month. We were far more economically productive with her playing a support role, which allowed me to dedicate an immense amount of time and energy into what had really become two full-time jobs at that point.
I brought on help at WCI (income increasing choice # 15), but the first thing I told Cindy was that she had to “more than pay for herself” or she wouldn't be there very long. She admitted later that was really intimidating, but I had no doubt she would do it because # 1 I knew her and # 2 I could see money slipping through my fingers constantly with this thing due to how busy I was. There was plenty of low-hanging fruit to pick up.
Prepared Hands
At the beginning of 2016, Mrs. WCI and I set a goal to make a million dollars in a single year. We felt that was realistic, but quite doable, and we made it with room to spare. Funny how often that happens with goals. And that brings us up to where we are today- with far more income than we need, soon to be debt-free (couldn't quite bring myself to pay off the mortgage before maxing out retirement accounts for the year), and having no difficulty exceeding all of our other financial goals. You think it's tough to save $200-$300K a year? It isn't when you make a million dollars. It's darn easy, I assure you, even with the massive tax bill that comes along with it. Especially if you set your fixed lifestyle expenses (house, cars, insurance etc) back when you were making $200K as a pre-partner. And that's the point- sometimes it is easier to make more money than to try to get more out of the money you're making. Did all that “extra” income make a huge difference? Absolutely, but it also landed in “prepared hands” that knew what to do with it when it arrived. If your hands are prepared to wisely use an extra $100K, maybe that $100K will be more likely to find its way to those hands.
How You Can Increase Income
I hope those ideas of what we did to increase income are helpful to you. For you, it might mean relocating to somewhere that pays better. It might mean taking more call, working more shifts, asking for a raise, taking on new responsibilities, or finding new efficiencies in your practice. Perhaps it means gradually grooming your payor mix so there are fewer “no-pay” and Medicaid patients, and more traditional insurance and concierge payors. Maybe it will require another job- real estate flipping, operating a franchise, or running a website. Or perhaps it just means converting a bigger portion of your active income into passive income streams. But I'll bet if you spend some time thinking about it, you can figure out a way to increase your income that is acceptable to you.
The Savings Rate
Your savings rate is simply the percentage of your gross income that goes toward building wealth. I usually count extra payments on student loans and mortgages, but not the payments due, but you can calculate it any way you like. I recommend attendings put at least 20% of their income toward retirement, with additional savings depending on your goals. Since residency, we've only been below that once and have often been far above it.
The chart is very random and probably requires some explanation. The denominator is gross income (carefully calculated even including investment income inside retirement accounts pre-2010, but just pulled from the tax records since) and the numerator is all savings, not just retirement savings. It's pretty obvious where I came out of residency (still living like a resident) in 2006. Some years the numbers look higher than reality, and other years lower. For example, we bought a (to us) expensive vehicle in January 2009, so it looks like we saved a lot in 2008 and less than half as much in 2009, but in reality those two years were very similar. I'm not really sure what happened in 2011, but the numbers don't lie. We contributed nearly $50K to retirement accounts that year, but our savings dropped by almost as much. I'm sure the severely negative cash flow on the unoccupied rental property and replacing two roofs that year had something to do with it. Likewise the percentages aren't climbing much the last couple of years despite a much higher income. We are spending a little more (new boat in 2015 and new car in 2016), but remember the denominator here is gross income. We're paying a ton more in taxes than we used to thanks to the newer Obamacare taxes and the overall progressiveness of the tax system. At any rate, the point of the chart is that the numbers are pretty darn high all the way across the board.
Once you have a high income, the most important thing you can do with it is to carve out a big chunk of it and use it to build wealth. For most docs, first you get yourself back to broke. Then you catch up to your college roommates. Then you start feeling like you're becoming wealthy. Then you hit financial independence. At some point in that process, you will probably feel like you need to loosen the pursestrings, and that's fine. But doing it a year out of residency isn't loosening the strings, it's hacking the bottom off the bag.
Why are we rich? Because #1 we make a lot of money and # 2 we save a huge chunk of it. The rest is just details. If you want to get rich, I suggest you do what rich people do, and just about every one of them I know did the exact same two things we did to one extent or another. I know of very few people who became wealthy making less than $50K a year (in today's dollars) and I can't think of anyone who became wealthy with a single digit savings rate.
What do you think? What have you done to boost your income? What have you done to develop and maintain a high savings rate? Comment below!
Nice post, WCI. No doubt it has been a combination of your hard work in school and on this blog, along with smart financial decisions, which has led you to where you are today.
I agree with the percentages you assigned for yourself. While increasing income and decreasing spending are critical to becoming rich, I would not understate the importance of investment returns for the rest of us whose income graphs aren’t parabolic like a long-term chart of Apple stock (your income graph is incredible). Whenever I run long-term projections of my possible net worth, the difference between returns like 2011–2017 (11% after inflation) and a conservative 2% return projection is staggering (potentially tens of millions of dollars in retirement).
Basically, I think for most physicians whose income will be relatively steady throughout their careers, investment returns will play a larger role then they have for you. While luck plays a big role in determining investment returns, of course we can improve our returns by reducing fees, using tax advantaged accounts, trading minimally, etc.
Congratulations again on your tremendous success; it truly is inspiring to me and I’m sure many other readers of your blog.
I’m glad you include extra mortgage and student loan payments In your calculation of savings rate. I’m only putting about 15% of my gross income into retirement accounts, but when you include the debt reduction too it brings my savings rate up to about 50% of gross income. Thinking in these terms is very validating for my current choices to prioritize getting out of student loan debt.
That’s right. Because as soon as the debt is gone, you can either invest that same amount or increase your lifestyle that same amount or some combination.
Question is your income the talER job plus WCI income? Or do you also include dividends, interest and capital gains? I guess human capital plus passive income?
Those are total income figures off my taxes (at least for the last 6 or 7 years, so it’s all income. The big contributors are my clinical income and now these last 3 years, the WCI income. But yes, all income is included that goes onto my taxes. So dividends and interest in a taxable account, but not a retirement account or HSA or 529.
Oh yes, congrats on your inspirational success
Kudos! You’re a great inspiration to hard work, a little luck, and great entrepreneurship! Any plans to cut back your shifts any further?
I think my ideal is 8-10 shifts a month as far as what I WANT to do. I’m at 12 now. My wife is encouraging me to cut back to 8, since the way it is currently it’s few enough shifts that I can go on all the trips I want and still work those shifts, but she can’t also go on all the trips she wants, AND have me go on the trips I want AND work those shifts.
The other factor is it is really important to me to maintain competence. I’m not even 42 yet and I intend to keep being an emergency doc for some time, and I refuse to be crappy at doing it. So I think I need to work enough shifts that skill and knowledge atrophy doesn’t become a problem. How many shifts are required to do that is hard to say, but I think it’s probably at least 8 at this stage of my career.
Nice post. I agree with everything you say. Earning enough and frugality are very important. I saw an article, by JL Collins, I believe, which stated that if your savings rate is high enough, you can make many errors in investing and still come out ahead.
However, don’t forget one very important factor: LUCK
You (and I) are lucky in that the stock market has been on a tear around the time when we had money to invest. In your case, you made more money after leaving the military. In my case, I paid off my student loans around 2008.
Many people do everything “right” but just aren’t lucky, such as graduating into a recession and being un- or underemployed at the start of their careers, which can affect lifetime income.
This post doesn’t have anything to do with stock market returns, its basically making a lot of money by work and then not spending it all by simply saving it. Even if the market had been going down during this time he still would be wealthy due to his savings rate.
There’s no doubt that luck plays a role in each of our lives (and most of us underestimate its role), but I’m not sure the tear the market has been on the last 8 years has really had a huge effect. I can actually quantify it and I expect I’ll save more this year than my portfolio has made in the last 8 years.
I totally agree. Fifty percent of 50k is much harder to live off then 50 percent of 200k… Money doesn’t add up as quickly either. For my purposes I have focused my career for long term income increases at the expense sometimes of short term moves. Corporate tech is a bit different en the doctor world. In my case someone else is deciding some of my opportunities to increase income. So my job is to show them I’m the right person and be ready when the opportunity shows.
The best method of increasing income varies far more between people than the best method for reducing spending.
Congratulations! As you rightly point out, both your income and savings rate determine how much money you save which determines how wealthy you get. Later on, investment returns matter a lot as well. In my own analysis, I’ve found that savings was 2/3 of my success and investment returns were 1/3. But a good and growing income allowed for a high savings rate while still having a comfortable standard of living which is the ideal combination.
Having said that, the % is what matters most. If you’re happily saving a large % of your income, then you are on the right track for a happy financial independence, regardless of your income. You may end up with less absolute wealth than someone with a higher income but it you have the amount you need to be happy, you’ve won the game.
It just turns out that most of us want to spend a similar amount so a high income makes it much easier to reach a high savings rate.
I absolutely agree that the game is not played against other people, but against your own goals.
Good article with lots of common sense.
Just curious what “making partner” means in the Emergency Medicine world. Do you buy-in to the practice? I wonder how an appraisal is done for a group that could have changes in their hospital/insurance contracts at any time.
Usually you “buy-in” with 2 years of sweat equity working as an employee. Your buy-out is pretty much just your share of the accounts receivable. It’s not a huge amount. The real benefit is your hourly wage is higher as a partner than as an employee.
Congratulations WCI.
I agree with you about the critical importance of high income and high savings rate.
Asset protection and insurance are important, but I also agree with your percentage that you’ve allocated to them.
However, the vast majority of physicians have probably gotten the most out of maximizing income by a few years after medical school. You are an exception to the rule. Similarly, there is a limit as to how high your savings rate can be.
So relatively early on, most physicians have reached close to the maximum, when it comes to increasing net worth using income and savings rate.
That leaves investing and tax planning. I’ve devoted considerable time to learning about investing, and the following has been my conclusion. Such time has been well spent, and has modestly improved my returns. But much more importantly, it has kept me away from bad investing. In other words, minimizing bad results has been considerably more useful than maximizing good returns.
There is also a limit, as to how productive time spent on investing is. Per hour spent, there is a diminishing return. To simplify investing, it’s about asset allocation, security selection and market timing.
Time spent on asset allocation has been very productive, but I’m starting to find that investing further time in it isn’t.
I’ve spent a small amount of time learning about market timing, and have come to the conclusion that it plays a very small role for me. I doubt that will change or that further time spent on it will help.
That leaves security selection, which I’ve spent a minority of my investing time on. I could allocate a lot of time to this, and there are many people who devote their whole working lives to it and do very well. Warren Buffett has beaten the S&P500 by more than 10% per year over his career. However, security selection is somewhat of a zero sum game. I’m spending some time learning about security selection, but there is a diminishing yield to it, and eventually I’ll stop doing that.
I’m still allocating a considerable amount of time to learning about investing; this also applies to tax planning. Time spent early on is much more productive than time spent later, as it allows compounding to occur.
Tax planning has been very productive. People often talk about how with 2 and 20 compensation, it’s very difficult (impossible?) to make money with hedge funds. But taxation can take more of your money than any hedge fund manager will. Once again though, there is a diminishing yield, as to how productive time spent on tax planning is. I see a point in the future, when it won’t be that useful to learn more about tax.
Also consider how much your net worth will increase per unit time spent on an activity. By working more, you may increase your net worth. But will your net worth increase more if you allocated that time to investing or tax planning. This is especially true after you’ve been working a few years and had a high savings rate.
I will say that being willing to pay for good advice has been very productive, especially when it comes to tax. However, I have found that relying on others completely isn’t a good idea. I can never know as much about tax as a full time tax accountant. But based on my experience, it still pays to learn the rudiments.
My final conclusion is that I see a point in the future, when spending considerable time on the four steps you’ve mentioned won’t be that useful.
By the way, I find the time I spent on internet discussion boards, such as this one, to be productive :-).
I agree that for many doctors, the income maxes out shortly after finishing training. In fact, that was what my original financial plan called for. It basically showed me working in the military for 4 years, then making $225K a year (the average emergency physician salary back then) for the rest of my career. I was still going to reach financial independence by 51-53 following that plan.
Obviously lots of good things have happened to my income since that plan was drawn up, not the least of which is what I call “the golden age of emergency medicine.” Emergency docs across the board are simply making more than I ever expected they would.
But I disagree with the idea that doctors can’t do much to increase their income. I think that, on average, most doctors are under-earning their potential income for lots of reasons. So I’m encouraging them to keep their eyes open and they might be surprised by just how much they can boost their income.
I agree that doctors are leaving money on the table. I moonlight at three side jobs for extra money in addition to my main job and my doctor friends all look at me like I have 3 heads when I tell them that. I think they’re crazy for passing on easy extra income for just a few hours of work per week.
I’d turn down doing 2 more jobs now. But I wouldn’t have 10 years ago when that income would have really made a difference in my life.
“So relatively early on, most physicians have reached close to the maximum, when it comes to increasing net worth using income and savings rate.”
I’m writing this, because the above statement in my previous post is wrong. Most physicians early on reach close to the maximum, when it comes to increasing their net worth by maximizing income. However, it’s not true that most physicians maximize their savings rate.
Unfortunately the way you first wrote it is probably more accurate to what actually happens. Few docs actually increase their savings rate from what it was their first few years out of residency.
The simpler you keep your investing and the less you trade, the better off you will be
My mantra is keep it simple stupid
Pick your asset allocation, diversify with 8-10 index funds, rebalance yearly
2-5 yrs before retirement, bulletproof your portfolio to maintain the income you need to spend yearly to preserve the capital you have attained
And avoid exotic financial products and annuities and whole life
I was at the lecture you gave last night, was great to finally meet you by the way. I did find the slide about savings rate and years to retirement interesting. Basically anything under 20% savings rate as doctors with our late start, and you are not going to retire until you are pushing 70. Reminded me to keep that savings rate a little higher.
Yes. Remember that slide excludes Social Security though. When you include that and many of the expenses that go away with retirement, a 20% savings rate is likely to get you where you need to be before age 60. If you start right at the beginning of your career, don’t make a lot of mistakes, and are willing and able to work all the way to 70, 10-15% may very well be enough. But 5% isn’t.
WCI you left out a step or two: choosing a less expensive medical school and choosing to pay for medical school with a military scholarship. (Or maybe you feel going military reduced your wealth?) Of course those are based on luck but so is having the brains and upbringing to become a doctor/ even qualify to apply to medical school.
Unfortunately I once ran the numbers and figured I came out about $180K behind by having the military pay for school. Not sure that’s the case now with the higher interest rates and higher tuition rates and of course it is specialty specific. But no, joining the military probably didn’t contribute much to this other than that it forced me to learn to live on a lot less than most docs live on right out of residency.
For me I’m uncertain whether military stint/scholarship increased or decreased my wealth. However for both you and I had we gone into some low paying specialty (even lower than FP which is my specialty? There are some) because we absolutely were driven to it and wouldn’t be willing to do anything else, we’d’ve been happy we’d had military support and pay and no student loans.
And actually for me, meeting and marrying my husband has provided me with many blessings; including a large part of our current lifestyle with his military pension; so I certainly owe the Army for that.
I have to put in a little plug for the military here – Your Mileage May Vary. The “typical” military path is:
“Richest” medical students
“Richest” residents
“Poorest” Attendings
If you do a nonsponsored residency, then you make whatever the civilian world is paying, with no nontaxed pay and allowances. That changes the math quite a bit depending on where you live – so that is not a great financial deal (although if you get better training at a nonsponsered civilian residency, then it could pay off later.)
I have run the numbers for several specialties, and the military works out to be even or better by the first opportunity to get out quite a lot of the time. Especially if you live in a high cost of living area during residency!
But money is not a great reason to join the military – that part is true.
Yea, it’s a lot better now that tuition has gone up so much.
But consider what things were like when I signed up- Med School tuition was $10K in-state, my classmates refinanced their loans at 0.9%, and I tripled my income by leaving the military.
At any rate, it doesn’t matter so much since it really shouldn’t be a primarily financial decision. If you want to go serve, go serve and you’ll be happy. If you do it primarily for the money, you’ll have four years of misery (but then at least you’ll be debt free.) I do tell people that there’s no reason to spend longer than 4 years living like a resident paying off your loans since you could do that in the military and be done!
Copy all.
Most prospective med students don’t know in advance that they will match into something more lucrative than primary care. If you wind up a military Peds, Int Med, or FP, you actually can be miles ahead by going HPSP or USUHS!
As a surgeon in an academic practice, I make less than my civilian counterparts in DC and now in Honolulu – but not that much less after taxes believe it or not. Geographic arbitrage in reverse – the military pays more (in allowances) to live in desirable places! Go figure.
Excellent post and visuals. The one thing I did to increase my income was simply getting another job. I was with the same group for about 5 years and thought I would poke around and see what was out there. The results surprised me. I got a 20% increase along with having my commute cut by 30 minutes each way. Now I can easily max out my 401k and my Roth and my wife can stay home to watch the kids, which is priceless. Don’t get too comfortable with your current position is my advice.
Exactly. Lots of opportunities out there to increase income if you keep your eyes open.
I fall in playing offense. 100%, all the time. I didn’t comment in the thread that was talking about saving everyday – yea that. Forget about that. I don’t micromanage or penny pinch. Simply state of mind: much rather boost income. Savings happen for me as I re-invest for income boost. Thats the thing, I don’t have to have a savings plan, I just have a growing income plan – comes with free savings plan!
Quite frankly, only so much income can be made in medicine. Must do entrepreneurial things to boost income. I’d say 80% of the reason – for me – is income boost periodically to quickly reach FI and 10 million by 40.
Income x Savings rate x Rate of return.
Play around with that – do 2 out of three really well and you are in great shape. Three would be fantastic (almost there!)
As long as the biggest 2 are income and savings rate I agree. But a 25% annual return of a 5% savings rate will mean that you still will take a long time to retire, and maybe never be able to if your income keep going up, but savings rate stays at 5%, thereby spending keeps increasing.
And I don’t think you need to penny pinch, or even really budget. Take your 20%, or whatever you choose, and set it aside. Then you can blow the rest on whatever you want.
Uh not true. I said 2 out of three.
An income of 1 million with 5% savings rate, at 25% for 10 years will get you to 1.67 million. Thats equivalent to somone making 250K (more than average doc salary I’d say) and saving 50%(!) of their income, getting 8% return (still high for index investing but sure lets continue) for 10 years.
I don’t penny pinch, but that thread somewhere sure seemed like thrift shoppers…
I think you proved my point, the return is the least important of the 3 you mentioned.
When will that first doc be able to retire? If he is used to spending $950,000 out of his $1,000,000 income, then retiring on $67,000 a year (4% of the 1.67M) is going to be rough….
For the other doc you mentioned, if he makes $250k and saves half and ends up with the same amount of money in retirement he could possibly cut back after the 10 years. Living on 125K and moving to 67K in retirement isn’t nearly as drastic as going from 950K to 67K would be…
I’m not telling anyone to penny pinch, but high income with high returns (which is 2 out of 3), even double the market returns, won’t make up for a low savings rate.
It turns out in the beginning savings rate matters more and in the end return matters more.
But I see your point. Yes you won’t retire unless you stop spending but the point is
1. its an interplay of three factors on a basic level and most great investors are natural savers.
2. Your networth growth is still the same in above example vs a higher saver.
I agree with both comments. Net worth is equal, its just harder to feel that FI as a high earner and low saver, which is different than being “rich” or even “wealthy.”
Can of worms though. Rich or FI has been discussed to death and everybody has a definition that’s more than just NW.
Hard to find an example of a person I mentioned above with 950k spending and 50k saving at 25. Mostly profit math. In general rich people are good investors and savers (consistently rich people)
The really lame thing about your “all offense all the time” plan is the progressiveness of the tax code. Lots of drag there.
But would you call your WCI venture lame? I think not.
Thus it’s not lame. QED.
Oh and question for WCI – whats the 2017 goal. Curious. Hit 1.5 mill? 🙂
Right now I’m working on getting my son to hold the pencil between his index finger, middle finger, and thumb instead of down by his ring finger so he can actually form letters I can read.
But I don’t know that we set an overall income goal this year. We do expect/hope/aim to have WCI generate > $1M by itself this year though. But the really tantalizing consideration is how I can get it to indefinitely make half that with 1/10th of the time commitment. Lots of ideas on that front.
The solution to that problem seems pretty straightforward:
1. Get WCI to make >1 Million per year
2. Hire someone to to everything that you were doing to get to step 1 and maintain. Pay them 500K. Could be more than one person.
3. Keep the other 500 K
I think managing your employee(s) could be done in 1/10th the effort. And for a 500K you easily be able to find someone smart and capable enough to do it.
re # 2 Are you volunteering?
Working in business coaching Bristol business owners come to me for all sorts. Established businesses come to me when they are stuck in a rut and need a sounding board. Entrepreneurs come to me to help launch their business. Unfortunately, one question I am often asked is how can we get rich quick. My answer is not what people want to hear!
It is interesting to see your income growth.
Savings is great, but income is king. My brother makes more than I do and while his monthly spending is higher, so is his savings.
The income growth is where I struggle the most. The time per dollar for being a physician is one of the highest if you are working. The problem is that when you don’t work, you don’t get paid. Finding the passive income streams (or early active ones like WCI that later become more passive) are a huge and sustainable boost. You just have to pick what you are comfortable with. For some that is real estate (too much liability for me), owning hotels (I have no idea how to do that), or running a website (my current plan). Whatever it may be it is important to start and see what happens.
It’s also important to constantly re-evaluate as to whether it is worth your time given the alternative use of your time (i.e. practicing medicine.) Lots and lots and lots of docs have become wealthy without any source of income other than their clinical practice. Doctors do make enough that if you combine it with a good savings rate and a reasonable investing strategy that you should be able to retire early. Maybe not 41 early unless you’re willing to live like Physician on FIRE, but certainly before 60.
DDD,
Question for you. Would you be interested in someone writing/blogging about how to do that as a physician? Just wondering.
Also is blog income really passive? I mean seems like its work to attract advertisers + write quality posts + engage with all the users (that actually is fun)
Roughly how many hours per week commitment is it ? Doesn’t seem easy despite barrier to entry being low.
It’s far from passive, but it is a lot of fun. It can eventually become more passive (see MMM posting once or twice a month now), but building a following and creating frequent compelling content, and helping people find it takes lots of time.
I probably put in 20 or more hours a week online, and I’m probably underestimating. Like when you ask a patient how much she or he drinks. Take that answer and double it.
It’s the weekend, so I’ll have one or two tonight.
Cheers!
-PoF
Definitely not passive. It is my third job now as far as time goes. The order goes:
1) Cardiologist
2) Dad (I take this as my primary responsibility but job 1 takes up more of my week still).
3) Blog- between 2-3 hours a day after my boy goes to sleep.
4) Home repair (buying a home and maintaining it is brutal).
Complete_Newbie, are you offering to write a post regarding how to start a blog as a doc? I think it would be interesting to see other’s experiences. I know PoF has posted recently on how he got his site up and running.
-EJ
Once I start a blog I see will DDD
Thing is where to concentrate: I have increasing access, confidence in doing RE deals (as a resident!) + am fairly close to closing on acquiring an ecommerce business + will be an attending soon. I believe in entrepreneurship – think that is something that physicians have lost. A blog focused on that is certainly missing and I’m thinking about starting documenting just that. Chicken or the egg problem though, exhausted from doing other things then how consistent would I be posting ?? 20-40 hour commitment ? Yea that’s a second job
Also WCI is not just a blog it’s a marketplace. He is in ad business, book sale business, referring business etc etc. that takes effort and support (wife, family etc) to reach peak performance.
Anyways kind of rambling but “frontend” comes with a lot of “backend” work.
Nice post! Very insightful.
Your savings rate in some years was absolutely great!
Keep up the good work.
It must be funny reading some of your old posts going on about issues that most docs are just never going to have (i.e., those related to having incomes >1 MM) and now you’ll be having those issues.
Good problem to have, though. Congrats on the success.
Kind of ironic isn’t it. I’ve been thinking a lot about estate planning lately now that I’m starting to think I might actually have an estate tax problem. But frankly, it seems awfully easy to just give away everything over $11M every year. $14K to everyone in your family and the rest to charity.
Tripped across an old old SDN post today where you couldn’t imagine ever making 400k and felt retiring age 50 to be impossible, had me a quiet chuckle
Yea. Good times. That’s what happens when you live your financial life in the public space. Surprises come up. Hopefully they’re all good.
Great post. I like the way you pointed out all the decisions over the years that led to such financial success. What is underneath this is habit formation. It works both with generating income and saving money. By constantly making little decisions that nudge us towards a higher income and more frugality, we make the big decisions that much easier.
Frugality has been something that always seemed natural to me, but in retrospect part of that ease is due to the creating of frugal habits. By making thousands of little decisions over the years it’s on autopilot. For some it may seem like deprivation, but for me it just seems natural.
I totally agree that income and spending (1 and 2) are the biggest factors in financial success. Another factor…1 spouse 🙂
I’m always curious to hear what other do to increase income? It seems like moonlighting really is that best option, but does anyone do the whole consulting gig or work as an expert witness?
I have a guest post coming up on it soon.
The relationship between income and wealth has been evaluated with a R-squared of 0.33:
http://www.visualcapitalist.com/relationship-income-and-wealth/
While 1/3 is nothing to laugh at, there is a heck of a lot more that explains wealth when looked at society as a whole. I’ll put my money on the savings rate and a bogleheads-like investment strategy over income.
Yes but you are ignoring time. My point in above triple factor was that rate of return higher than normal or income higher than average will get you to your goal faster (duh!)
Sorry but enjoying money when young is better than being old. I can reach FI with doctor only income and index investing sure but like when I’m 60. Show me a knee without arthritis at 60.
Money is fungible … lifetime isn’t.
See post #25. Sorry.
Please show me how you can guarantee a superior rate of return over the long haul. Most people will only deviate from the market return in a way that is negative. Most people can adjust their savings at far less effort than it takes to raise their income. If your message is that we should be going on offense and going entrepreneurial to boost income to that end I believe you are forgetting about the downside risk. Most people, including most doctors, should heed the above chart and research on the savings rate effect on wealth creation. One should also be cautious about investing their time in things for the offense based on a few noteworthy exceptions.