When Stanley and Danko wrote the personal finance classic The Millionaire Next Door in 1996, they coined the term Under Accumulator of Wealth (UAW). I don't think I've written about it for more than a decade. I wrote about it once on the blog and mentioned it in the original The White Coat Investor book. The basic formula is as follows:
(Age × Gross Income) / 10 = Target Net Worth
If your net worth is too low relative to your age and gross income, you're a UAW. The opposite, someone with more wealth than would be expected, is a Prodigious Accumulator of Wealth (PAW). The formula has plenty of problems, which you'll soon see as we go through the nine reasons doctors are usually UAWs.
#1 The Late Start
The issues with the formula are quickly revealed when you realize the first reason doctors are UAWs—age is a factor in the formula. Doctor earnings are typically delayed by 7-13 years compared to other college graduates and by 11-17 years compared to those who started working right out of high school. With college, gap year(s), medical school, residency, and fellowship, the education goes on and on. Even worse if it's a second career. A 35-year-old doctor leaving residency with an income of $375,000 is somehow supposed to have $1.3 million in net worth. Fat chance. The loss of a decade of compound interest takes a massive toll in how much is eventually acquired, too.
More information here:#2 Student Loans
Seventy-five percent of doctors borrow to finance their medical education. So, that 35-year-old doctor not only doesn't have a net worth of $1.3 million, it's more likely -$400,000! It takes a while to dig out of that hole, all the while severely restraining net worth growth.
#3 High Tax Bill
Our final issue with the formula itself is that it uses gross income, not net income. That's fine, except it doesn't acknowledge the fact that our federal system, and even many state income tax systems, are quite progressive. The difference between gross income and net income is a lot bigger at a doctor's salary than it is below the median salary, where the federal income tax burden may be as low as $0 for a small family with one income. It's just harder to build wealth when more money goes to the taxman instead of the investment accounts.
#4 Lack of Finance, Investing, and Business Training
The remaining reasons why physicians are all too often UAWs are not an issue with a formula but an issue with physicians themselves. If you're anything like me, you went to college and studied something like molecular biology. You took no business classes, read no financial books, and pretty much ignored money as much as you could. You went to medical school, and it was more of the same. There were no financial classes, and most of your instructors didn't know much about money and certainly never talked about it. In residency, you might have had one lecture about finances, given by a whole life insurance salesperson. Then all of a sudden, you're handed a $200,000, $350,000, or $500,000 income and expected to manage it in a competent manner. That doesn't usually end well.
#5 Expectations
Doctors are assumed to be rich, whether they are or aren't. Doctors act as though they're rich. Their spouses act as though they're rich. After working so hard for so long and sacrificing so much, they feel like they deserve far more than they can actually afford at that stage of their lives.
Their extended families refer to them as “the rich doctor.” Their peers have expectations about how they should spend. Society itself has expectations. Doctors are looked down upon when they park their 2005 Honda Civic in the doctor parking lot. Contractors charge them more when they find out what they do for a living. They live in neighborhoods where their neighbors have fancy cars, throw fancy parties, enjoy time on fancy boats, go on fancy vacations, and send their kids to fancy schools. They feel like they need to keep up with the Joneses.
It's actually not that hard to spend an entire physician income and have nothing left over with which to build wealth.
More information here:- Building Wealth While Living in an Expensive Neighborhood
- The Financial Benefits of Avoiding the ‘Cool Place’ to Live
#6 Financial Taboos
Despite all WCI has done to remove it over the last 15 years, there still exists a financial taboo in our medical schools, residencies, academic medical centers, and even community hospitals that a doctor who thinks about, talks about, or reads about money is a bad doctor. The opposite is actually far more true. It's easily seen even in comments left on this website. Here's a good example:
“Whoever wrote this article is a moneygrubbing piece of s***. Medicine was never designed to be a cash cow but an honorable monastic-type lifestyle of self-sacrifice caring for and ministering to the sick. A doctor’s patients always take priority over everything else, including his family. If any doctor takes exception to my views then he/she doesn’t belong in the medical profession.”
It isn't just that doctors never get any financial training. They're actually publicly shamed if they even think about learning anything about managing money. No wonder so many of them don't.
#7 Burnout
The burnout rate for physicians varies by specialty, but it averages somewhere in the 50% range. That typically rears its head by mid-career. So, if you start with a negative net worth at 30 or 35 or 40 and are so burned out that you have to cut back or even quit completely by 40 or 45 or 50, it's pretty hard to ever be anything but a UAW.
#8 Divorce, Disability, Death
Bad things happen to people, including doctors. Some, you can insure against; some, you can't. But the big Ds (divorce, disability, and death) happen to doctors, too, along with lots of other stuff. Fertility costs; special needs kids (maybe even more common when you start your family late due to spending your 20s in school); taking care of less well-to-do parents, siblings, and other family members; and plenty of other individual circumstances keep wealth building from being a linear process.
More information here:#9 YOLO
Something happens in your mind when you spend all day seeing people, many of whom are quite young, dealing with severe illnesses and injuries. You realize you're not immortal and that maybe you should live it up while you can. It's a pretty natural reaction. So doctors do. That's not all bad. Your goal shouldn't be to die the wealthiest doctor in the graveyard. But it isn't hard to go overboard.
There you have it. Nine reasons why doctors are usually UAWs. If you don't want to be a UAW, you're going to need to do something different from what most doctors do. You're going to need to save a bunch of money, become financially literate, become financially disciplined, and put your money to work alongside you. I think it's worth it, but it's your life and your money, so you decide.
What do you think? Any other reasons why doctors are UAWs? If you're not a UAW, how have you combated that?