“If you can't live on $200,000 a year, you have a spending problem, not an earning problem.”
–The White Coat Investor
An Earning Problem
I've been using this line for years when talking to medical students and residents about their finances and their future. They usually laugh because the truth of the statement is so obvious to them. Attending physicians who are spending $225,000 while earning $200,000 don't think it is quite so funny, or so obvious. They view their issue as an earning problem. “If I could just make another $25-50K a year, then I'd be fine,” they think. Well, some doctors do have an earning problem, but that's an awfully rare situation. I suppose I had an earning problem when I was a military doctor. My gross income was less than the 5th percentile for my specialty, and that included a lot of part-timers, of which I wasn't one. In fact, one year when I was deployed I nearly made it into the 10% tax bracket! Residents and fellows often have an earning problem, considering their vastly negative net worth. However, if you have a six figure income, you make enough money to have a happy, comfortable, financially secure life. That money goes a lot further in rural Indiana than the NYC metro area, but it's still plenty of cash to keep a roof over your head, food on the table, and save for retirement.
A Spending Problem
So, few physicians and other high income professionals truly have an earning problem. Many more have a spending problem. They have chosen not to take money off the top of their paycheck to save. They have also chosen not to budget their expenses. You don't have to do both of these things, but you'd better do one or the other. Saving “whatever is left over” only works for the truly frugal, and there are few of us out there and most of us are gradually becoming less frugal all the time. Even many doctors who come to this site have a spending problem. But their issue usually isn't that they spend more than they earn, or even all that they earn. They simply save too little. Instead of saving 15-25% of their income for retirement, college, and future expenses, they might be saving just 5-10%, which as I've shown before, isn't going to cut it. They just need to be a little more frugal, save their next income increase, or make saving a higher priority.
What's Your Problem?
However, the vast majority of the readers of this blog don't have an earning problem or a spending problem. Their problem is a “what should I do with my money” problem. How much insurance should I buy? Should I prioritize college savings or retirement savings? When should I pay off my student loans? How much of my retirement money should I put into stocks and how much into real estate? Should I pay off the mortgage early? How can I get more money into tax and asset-protected accounts? Do I have enough to retire?
This is a great problem to have. When I talk to family, friends, and random people on the internet I realize just how rare it is to be struggling with these issues. The vast majority of Americans have an earning problem, and at least as many have a savings problem. Many people have both. They make too little and they spend it all.
An airline pilot made a comment on the blog recently. He is in his late 40s and making $25,000 a year. Many lower and middle class folks have more consumer debt than annual income. I have family members who would love to qualify for a mortgage, much less pay it off early. The truth is that you won the money game on the day you received your medical school acceptance letter. It isn't automatic to become wealthy as a physician, but it is still pretty easy. It is not complicated to translate a high income into a high net worth, even if you're starting out with a very negative net worth. Good football coaches know that when you're way ahead in the fourth quarter, you run the ball. An extra 3 points isn't worth the risk of a fumble or an interception. You've already won the game, just don't blow it. Save 20% of your income and invest it in a reasonable manner. Keep your taxes and investing expenses low. Insure against financial catastrophe. Give to charity and enjoy the “good life.”
What do you think? Do you have an earning problem, a spending problem, or a “what should I do with my money” problem? Comment below!