By Dr. James M. Dahle, WCI Founder
The greatest wealth-building tool that most physicians have is their ability to turn their time into money at a very high rate. Physician incomes are typically in the top 1%-5% of households.
Data from the most recent Medscape salary survey shows the following:
Now, there will be lots of people out there willing to argue that $250,000 a year is just a middle-class salary. That simply isn't true, even if you live in California, New York, Hawaii, or Washington DC. It is still a top 5% salary in all of those locations. If you are making the average primary care income, you have a higher income than at least 19 out of 20 households in your state. It is even better if your spouse has some earnings.
This income is your greatest wealth-building tool. It's not your house. It certainly isn't your debt. If you're like most of us, you won't be getting any significant inheritance or it will come too late in the game to really change anything. If you want to become wealthy, you must use that income to build wealth.
One of the most interesting slides I've ever seen in a Medscape survey was only published in a single year, 2016. I use it all the time in presentations.
There is a lot of fascinating information there, but I want to focus on just one section: that section for those aged 65-69. For the most part, these are doctors who have been retired for a while, who have just retired, or who are on the cusp of retirement. What does the data show about their net worth? Remember net worth is everything you own minus everything you owe. It's the value of your home equity, your retirement accounts, your investments, your savings, your checking account, your cars, your clothing, and your recreational vehicles. The data shows the following about doctors aged 65-69:
- 11% have a net worth of <$500,000
- 14% have a net worth of $500,000-$1 million
- 27% have a net worth of $1 million-$2 million
- 34% have a net worth of $2 million-$5 million
- 14% have a net worth of $5 million+
Astounding! That tells you that after 30+ years of physician paychecks, 25% of doctors are not yet millionaires. No wonder our Milestones to Millionaire podcast is so popular. Heck, there are a lot of doctors out there that have $500,000 just in their homes! I'm sure there are a lot of sad stories in that 11% number. Disabilities, divorces, and scams certainly exist. But there's no way that accounts for most of that segment of doctors. Consider the math. If you earn 8% a year on your investments and they compound for 30 years, how much do you have to save each year to reach each of these milestones (and remember this ignores your house and all your stuff):
- $500,000: =PMT(8%,30,0,500000) = $4,413 per year ($368 per month)
- $1 million: =PMT(8%,30,0,1000000) = $8,827 per year ($736 per month)
- $2 million: =PMT(8%,30,0,2000000) = $17,655 per year ($1,471 per month)
- $5 million: =PMT(8%,30,0,5000000) = $44,137 per year ($3,678 per month)
It is pretty hard to argue that any of those figures are overwhelmingly difficult to reach. You can get into multi-millionaire status without even maxing out a 401(k) each year. Even if you only make $244,000 (the average primary care income), you can live on $200,000 a year and still put $44,000 a year toward retirement.
Why do so few doctors do that? Why are they so desperately trying to find a side gig, build out a portfolio of rental homes, or hit a home run with a well-timed cryptocurrency “investment?” It is simply because they have not learned how to harness the power of their income. In short, they spend too much and save too little. Many of them are even living hand to mouth, paycheck to paycheck.
Incidentally, if you really want to get doctors fired up and talking about money, there are two guaranteed ways to do so. The first is to write a post about automobiles, and the second is to publish even a hypothetical budget. Criticisms and personal stories will come flying out of the woodwork, guaranteed.
The thing is, despite the fact that a physician's income is, at a minimum, a top 5% income that allows you to buy anything you want, it does not allow you to buy everything you want. You simply cannot do it all. You must prioritize and decide what matters most to you.
Let's go back to our five categories of doctor wealth above and consider what kind of decisions those doctors might have made. If we pause and consider the “big” financial decisions that doctors make in their lives that could have a significant impact on their wealth accumulation, we might come up with a list like this:
- Practice a specialty with lower average pay “because it is what I love to do”
- Take a job that pays below average in your specialty “because I like the people I work with”
- Live in a high cost of living area “because my family is here”
- Support a non-working spouse “because my spouse supported me during college and med school”
- Live in an expensive house “in a safe neighborhood with good schools”
- Place kids in private school “because what matters more than their education?”
- Churn new cars every three years “for safety and reliability”
- Take out extra student loans and drag them out for a long time afterward “because surely I can earn more than 5% on my investments and nobody really ‘lives like a resident‘ anyway; that's just a white coat investor thing”
- Hire out a lot of services “because my time is too valuable to clean house, mow lawn, repair cars, watch kids, or plan vacations”
Let's take these big decisions and put them up against our five categories of physician wealth. How many of each of these “less effective” financial decisions does each category of doctor typically make? There's no data on this, but we can speculate. Before we get there, why not go down that list and count up how many of them you check off personally? Then compare yourself to this chart below:
- Doctor A (< $500,000 in net worth at retirement): 6-9 “less effective” decisions
- Doctor B ($500,000-$1 million in net worth at retirement): 5-6 “less effective” decisions
- Doctor C ($1 million-$2 million in net worth at retirement): 3-5 “less effective” decisions
- Doctor D ($2 million-$5 million in net worth at retirement): 2-4 “less effective” decisions
- Doctor E ($5 million in net worth at retirement): 1-2 “less effective” decisions
“Less effective” is an unwieldy term. I thought about using the word “wrong,” but “wrong” really doesn't encapsulate what I am trying to say. It's not wrong to do any of this. It's just wrong to do all of it. My point is not that you cannot do any of these things. You certainly can do some of them and be financially successful. But you cannot do all of them wrong and be surprised that you end up living paycheck to paycheck for decades and then have nothing left to show for all those years of work.
Some in the medical personal finance community shame each other for wearing expensive scrubs, sending out cookies to Twitter pals, or buying a round of shots for colleagues. But that's not really the problem, is it? In fact, for at least three of those categories, there really isn't a problem at all. Plenty of Americans retire on “just a million” dollars and have perfectly happy, comfortable retirements. They get some money from Social Security and take some money from investments each year, play some golf, visit the grandkids, and go on a cruise every now and then. But for two of those categories—and about 25% of doctors—there is a problem, and it has serious impacts on your financial life and your retirement. You simply cannot make ineffective choices in the majority of these decisions and expect to build significant wealth.
Practically speaking, what does this mean? We're not talking about the gastroenterologist married to the cardiologist living in a $500,000 home in a medium-sized city in Iowa here. We're talking about the primary doctor in California, aren't we? Or the academic doc in New York. Or the military doctor in the DC area. Or the associate dentist in Seattle.
Let's say you are a primary doctor from California and really want to stay there to be around your family and enjoy the sweet weather. How can you still build wealth? Let's look at the decisions. Two of them are already made:
- Specialty Choice: Low Paying
- Job:
- COL: High
- Spouse:
- House:
- School:
- Cars:
- Student loans:
- Hiring out:
There are still seven decisions you can make that will have significant effects. If you get most of those “right,” you can still build lots of wealth. Maybe your decisions look like this:
- Specialty Choice: Low Paying
- Job: Took an academic job for seven years and then opened a DPC private practice and worked hard to maximize its revenue, getting it up to $300,000 a year
- COL: High
- Spouse: Spouse takes a job making $70,000 a year and you save most of it
- House: Bought a $750,000 house instead of a $2 million house
- School: Put the kids in a private elementary and a public junior high and high school
- Cars: Drive 10-15-year-old Honda and Toyota sedans
- Student loans: Took advantage of PSLF at that academic job
- Hiring out: Hired a house cleaner, mow our own lawn, and found a good local mechanic to look after those sedans
How many “less effective” decisions does that add up to? Three or 3 1/2, depending on how you count. Is this doc going to be OK? Probably, they'll be just fine. They are not going to win any pissing contests on the WCI Forum, retire at 45, or endow a chair at their medical school, but with careful planning and budgeting, they're going to have a pretty nice financial life before and during retirement.
Let's go through another example. Let's make this one an associate dentist in Salt Lake City.
- Specialty Choice: Low Paying
- Job: Low Paying
- COL: Moderately High
- Spouse: Not Working
- House: $1 million
- School: Public
- Cars: One older sedan and a new Tesla
- Student loans: $400,000
- Hiring out: Just a lawn service
That's not looking so good, eh? That's 6 1/2 less effective decisions. This doc could easily become a severe under-accumulator of wealth. Let's say the doc gets together with the spouse, and they decide to make some changes. They decide to move to a small town that is not so saturated with dentists and open a practice. Yes, they will need to take out a big practice loan, but within a year or two, they have already doubled their income and could even 4X it if they keep working hard. The spouse works part-time as the practice manager, further increasing income. They swap that Tesla for an F-150 that fits in better in the small town, and they start hammering those student loans as fast as they can. They even get a little lawn tractor and teach their now 11-year-old how to use it. How have they turned things around?
- Specialty Choice: Low Paying
- Job: High Paying
- COL: Low
- Spouse: Working
- House: $350,000
- School: Public
- Cars: One older sedan and a used F-150
- Student loans: $150,000 and falling fast
- Hiring out: Nothing
Yes, there's some geographic arbitrage there, but that's hardly the only change that was made. This couple is not going to have any trouble at all retiring comfortably. They might even become deca-millionaires.
Now let's look at a sample (hypothetical but very realistic) budget for a 35-year-old doc and his wife who cares for their two kids full-time. What advice do you have for them?
Income
- Annual Salary: $210,000
- Effective tax rate: 24%
- Monthly after-tax income: $13,300
Monthly Expenses
- Mortgage (3.5%, 30 year, $650,000): $2,900
- Home insurance: $100
- Property tax: $500
- Electricity: $200
- Water: $100
- Natural gas: $100
- Cell phones: $100
- Disability insurance ($12,500 benefit): $500
- Life insurance: $100
- Auto insurance: $100
- Car payment (one car paid off): $400
- Student loan payment ($250,000, 10 year, 5% fixed): $2,700
- Gasoline: $500
- Groceries: $1,500
- Eating out: $500
- Clothing: $500
- Kids activities: $500
- Entertainment: $300
- Vacation: $1,000
- Health insurance/health care: $700
- Total spending: $13,300
This couple is spending everything they make. No savings at all. What are their choices? Let's look at the decision list from above and characterize their situation:
- Specialty Choice: Low Paying
- Job: Low Paying
- COL: High
- Spouse: Not Working
- House: $750,000 on an income of $210,000
- School: N/A
- Cars: One older sedan and a newer SUV on credit
- Student loans: $250,000 on a 10-year plan
- Hiring out: Nothing
That's 5 1/2. That's all it takes to be living paycheck to paycheck. Yes, those student loans will eventually be paid off. And maybe, just maybe, this couple will redirect that savings to retirement savings. The late start will hurt, but $2,700 a month—even starting at age 45—should still get them to millionaire status. But in reality, those first five decisions have pretty much boxed in this couple. Something has to give. Geographic arbitrage might be the best option, but at a minimum, there needs to be an ongoing job search here for one or both of them. Perhaps some extreme budgeting in the variable expense categories could find $1,000-$2,000 a month to invest.
Your income is your greatest wealth-building tool. Don't squander it. You can have anything you want but not everything. Choose carefully, my friends.
What do you think? What advice do you have for doctors living paycheck to paycheck? Have you ever been in that situation? Why? How did you get out of it? Comment below!
This is a great illustration of just how quick seemingly innocuous spending can have such a negative impact on wealth building!
I check about 1.5 boxes on the list which helps my wife and I save 40-50% of our gross income each month. This has obviously been a huge reason I’ve been able to dig my way out of my many financial mistakes!
One of your best posts ever. Probably belongs on your “Classics” page.
Completely agree. This is probably your most important message for your readers.
Thanks both of you for your kind words.
I would concur. I would consider this “evergreen.” I doubt that one off medscape slide ever changes significantly (at least until there’s a whiole generation of WCIers)
Great post. Amazing how quickly you can spend money. My wife is a pcp and makes 225k a year. I work in the ER and make 360k a year. We both finished residency 1 year ago . In residency we saved 25% of our income. We have no student loans and moved to a low cost of living area. Our plan post residency was to live on her salary after taxes and save my salary after taxes. I thought no way we would spend more a year than we made combined as residents but it’s amazing how quickly it happens. We still achieve our goal of saving my income and have a 50% saving rate but after a baby with childcare costs, a new house, and a new car it’s amazing how quickly our lifestyle crept up to our budgeted amount.
It’s definitely the natural thing to grow into your income. It takes real effort to not let it happen.
I started my career saving 30% of gross income. Eventually, saved 50% of income. Became FI and stopped practicing in my mid-40’s. Now I’m spending as much time as I want to with my wife and kids. I didn’t take for granted my higher income and utilized time and compounding interest. Save and invest first, then live on the rest. It’s rather simple, actually. When my extended family and colleagues realized my savings rate, their jaws dropped. I value time with my family and living life on my own terms over Mcmansions, luxury cars, and exotic vacations. But, to each their own.
Wise post. My one pushback is that more physicians should take the “1” if needed to have fulfilling practices. Two college friends have spent their entire careers unhappy with long hours and minimal intellectual stimulation in their practices and regret their path. I know some physicians don’t see their career as a calling, but there are many niches to extract satisfaction from medicine. The column applies well to an academic medical career. There a lot of ways in academics to avoid the “1”s: interesting travel is part of the gig; side consulting is often interesting and it is easy to apply your specialized knowledge; the university pay is on the low side, but there is a 7:1 match that pays 15% to retirement, that, combined with savings and a SEP from consulting, accumulates well; the university paid half of my kid’s college tuition; a 15 year mortgage is paid off—not too many “1”s and having more fun than my college friends are having in their practices.
My one pushback for you is that you should probably be using a solo 401(k) instead of a SEP-IRA so you can do Backdoor Roth IRAs.
https://www.whitecoatinvestor.com/sep-ira-vs-solo-401k/
Thank you for this informative article on the power of our choices and the balance of what makes us happy now with financial freedom. I interview applicants for our private practice regularly and am reminded how little med students and residents think outside of their narrow focus of the next goal. Your platform provides excellent education on financial choices for life, happiness and freedom.
Thanks for your kind words.
Great practical article about planning and setting priorities. I would note a couple of things.
Many people do not “choose” their lower paying specialties. There are many residency slots for primary care and IM. Most people go into these fields because that is where the needs are, so that is where the training opportunities are. There are very few slots for spine ortho or cardiac surgery. No matter how many people may want to enter those fields, and they get many more applicants than there are jobs, only a few people will get them. Because they are competitive, only the top med students have any chance. For the 3/4 of students who are below the 75%ile, these fields are completely out of reach. And long shots for the 75-90%ile. Most docs in low
paying fields are there because most fields are low paying and most students do not have high paying options.
You want to train in peds at any of hundreds of programs? No problem. You want cardiac surgery at Cleveland Clinic? If you are not the top student in your class with rave reviews from your surgery preceptors, forget about it.
The same applies to jobs. People have to take the opportunities available. Location, nature of practice and financials all figure in but half of all docs make less than the median income for their fields.
Some people turn out to be much better at the business side of medicine than their peers. But most are around average, half are below the median and there are outliers on the low end as well as at the high end.
Thus, for most docs, getting their incomes above average for physicians overall or for their fields is somewhere between extremely challenging and not possible.
Where one goes to med school and how they do will have a major effect on their lifetime income. Much of their financial future is determined in match day. Sure, there are people who make exceptionally high incomes after being mediocre students and going into low paying fields. But they are just that, exceptions. Not impossible but highly unlikely.
The example doc making $244k, living in 200 and saving 44 had better include taxes in that living cost. Otherwise the IRS will get annoyed. A few years making license plates and eating for free in prison will cut the savings rate. At 200k, including taxes, they are living well below the consumption rates of many of their higher earning peers. Not that anyone NEEDS to spend that much, but it does mean that many docs cannot afford to spend like that.
I disagree. We all get a choice. Even if you can’t match into a few specialties due to subaverage medical school performance, there are still lots of choices out there. The vast majority of medical students match into their specialty of choice.
One can be well above average in med school and still be uncompetitive for the highest paying specialties.
It is not that NO ONE can make more than is typical for their specialty. Clearly, there are distributions of incomes in every field. My point is that, by definition, members of a specialty collectively are average. If it were possible for any and all, say, primary carr docs to make more than average, then the AVERAGE income for those fields would be higher.
Most people in a specialty cluster around the typical income. Half of people in a specialty make less than the median. Simple math.
There is no reason to think that everyone in a specialty can make much more than a typical income. No more than to think that everyone can invest better than average. In both cases, the average includes the outliers.
Be careful.about interpreting match statistics. Med students do not waste time and effort applying in fields where they have no chance of matching. Students look at board scores and AOA in various fields and talk with advisors. The vast majority of them are never getting a residency in neurosurgery and they know it. So they do not apply.
The percent of students who match into the specialty IN WHICH THEY APPLIED tells us nothing about what the proportion would be if everyone simply applied for the most competitive programs, regardless of their prospects.
If you go into primary care- because you were a superstar in med school but picked a lower paying field over cardiac surgery, or because you knew you would never get in cardiac surgery and did not apply you end up in a lower paying specialty, the result is the same. The distribution of incomes in your specialty will have a lower central tendency than if you had taken that card surgery position they offered you.
If you have such good business skills that you would be an exceptionally well paid PCP, then you could have applied those same skills to your spine ortho practice and made far more money.
The average person is average. The average med student is average for med students. The average PCP doc is average for PCP docs. The average neurosurgeon is average for neurosurgeons. If you are a med student and objective reality supports the idea that you are far above average, then you have a different set of career options available to you than does the average student.
As for spending patterns, spousal incomes, COL areas, etc. All true but off the topic of my post, which concerned earned income. Mainly earned income from practicing medicine but would include business development skills.
“Thus, for most docs, getting their incomes above average for physicians overall or for their fields is somewhere between extremely challenging and not possible.”
Balderdash
I’m a primary care subspecialty doc (residency easy match, fellowship medium difficult but easily doable since most of it is “showing up” to fellowship directors) and make nearly double what the national average PCP makes because I actively sought out a job that I knew would pay well. I kept in touch with the CEO of the practice for literally years waiting for a spot to open and mentioning I’d love to work there. Wife works but doesn’t have to (makes 40K/yr). I drive a *very* sensible vehicle, and we budget tightly enough to save ~120K/yr without what I would consider much sacrifice. Wife got a nice vehicle for putting up with me and being a wonderful woman (got a cash discount on it). Have 1 kid and 1 on the way, but already 10K in the “on the way” kid’s 529 and 27K for the older. Worth ~650K 3 years out of school because I saved aggressively and chose low COL area to practice. Funny how those higher paying jobs within specialties are commonly found in low COL areas… Humble bragging to give a living counter to the idea that you’re resigned to playing some predetermined hand of cards.
Bravo to you. I know plenty of broke 50 yo radiologists
Good advice and a good reminder to be thankful for the steady and relatively large physician income. However physician income is more like a bond than a stock as we don’t have any options to jump to a startup or other risky jobs with potential millions in pay but at least can continue to invest even in a recession when many other lose their jobs. Tough to realize but better than most other situations people are in.
Docs seem to fixate on the “potential millions” available in these other jobs, but 7 figure jobs are few and far between. If you’re the type who can make 7 figures outside of medicine, you’re probably the type that can make 7 figures in medicine.
Bravo to you. I know plenty of broke 50 yo radiologists
That is scary. How did these 50 year old broke radiologists manage it? Huge malpractice losses? Bad divorces? Crime victims? Aggressive investments that blew up?
Not everyone has the leisure to uproot a family and move to the middle of a cornfield just to save some dollars. You can take the fast paced higher paying job you hate other than the bottom dollar and retire early burnt out and bitter. Balance is needed based on personal preference. Most important note is to modify some of decisions: just as you hopefully don’t have them all wrong, you can have a fulfilling life AND career without perseverating on having every single one checked off as ‘most effective’.
FORD F150 2022 = $31,520 – $77,625
TESLA MODEL 3 = $48,490 – $61,990
just fyi
Which one will pull my boat and haul my raft at the same time? Saw a study recently on an electric truck vs a diesel truck. On one tank the diesel truck pulled the trailer 300 miles or something. The electric truck on one charge? 50 miles. The technology just isn’t there yet. If you actually need an F150, you can’t make do with an electric truck, much less a Tesla 3.