[Editor's Note: Today's WCI Network post is from Passive Income, MD, and describes a surprising number of doctors and one solution to their issue of living paycheck to paycheck.]
I was having a discussion with a colleague recently, and the conversation eventually turned toward finances. He informed me that if his home refinance didn’t go through, he would have difficulty in making his house payment next month. Needless to say, this was weighing heavily on his mind, and he was visibly stressed.
I sympathized with him.
It bothered me deeply that even after finishing his training and “making it” as an attending, he was still essentially living paycheck to paycheck. I thought about it for a good while, and realized I had to dig a little deeper.
After all, how is it possible that a physician making over $250,000 a year is barely scraping by, and living in fear of missing his next mortgage payment?
Assumptions
I decided to break it down on a spreadsheet and made a couple of safe assumptions for a physician working and living in Southern California. Here’s a quick key to what you’ll see:
- Our example is a family of four with one working parent (the doctor).
- Income Tax: I’ve assumed a 35% effective tax rate, but I’ll show what it would look like as a 30% or 40% effective tax rate.
- Student loans: I used the current average loan of the typical graduating medical student ($183,000), consolidated at a 10-year term, at 2.95%.
- Mortgage: I assumed a purchase price of $1.5 Million, which, unfortunately, is pretty average here in Southern California. I also assumed a 20% down payment and a standard interest rate of 4%.
- Private school average tuition is $22,000 per year or $1833.33 per month, 2nd child is in preschool.
- Food: According to the USDA, the average cost to feed a family of four is $1200/month. Living in California, the cost is easily almost double that.
I didn’t even include extra miscellaneous items such as home maintenance and upgrades, clothing, entertainment, etc.
The Spreadsheet
Here is the spreadsheet I designed to shed a little light on this predicament.
Living Paycheck to Paycheck
When it’s been broken down like this, it’s easy to see why the average doctor might be struggling to keep up, especially living in a place like Southern California. And how do most physicians make up the difference? They work harder and longer. Perhaps they pick up extra shifts. Unfortunately, this equates to simply working more just to support your current lifestyle, leaving precious little to be able to save or invest.
Surely, there must be a better way.
Well, I’ll come right out and say that a perfect solution doesn’t exist. However, it is my opinion that working harder or working more is not sustainable. This will only worsen the physician burnout epidemic.
I’ll never pretend to have all the answers. I just know that I am taking steps to avoid ending up in the same situation. Yes, one of the obvious answers is to reduce your expenses. That’s easy to suggest.
However, I want to focus just as much (if not more) on creating additional sources of passive income. The harsh reality is that we can only work so hard. Our time is both limited and precious, and it shouldn’t be spent working more, just to make ends meet.
If my colleague’s situation resonates with you for whatever reason, I encourage you to follow my journey. There’s always a better way. Let’s find it together.
[Editor's Note: There are two parts to the personal finance equation. The first is to boost income. The second is to cut expenses. It's usually best to work on both sides in order to maximize the chances of success. Even in a high cost of living area, you must pay attention to your expenses; you don't get a pass on math just because you're doctor who lives in CA, HI, NY, DC, etc. On a doctor income, you can usually do anything you want (nice house, fancy cars, private schools) but you can't do everything you want. On the income side, sometimes it makes sense to take steps to boost your primary income. I'm always amazed at the intraspecialty variation in pay and how much it dwarfs interspecialty variation. In the last month I've met a family doc making half a million dollars a year and a pediatrician making over a million. It is much easier to build wealth when you have that sort of an income. If you're interested, side gigs and investment income can also contribute or even replace your clinical income. It's hard to argue it is mandatory for someone with a doctor income to get “passive income”, but it certainly felt that way to many docs in 2020 when their income dropped off a cliff for a few months!]
What do you think about these expenses? Can you relate or not? Comment below!
I would not consider a couple making $250k a year (assuming this doc’s spouse does not work) high earners in Southern California. We have friends who are software engineers and make around that much. They live in modest 2 to 3 bedroom condos and drive 10 year old cars . In my mind, that’s the average salary for a high end middle class family in Cali. This doc likely bought too much hosue and is now house poor. I would downsize to a nice condo in a good neighborhood, which would cost around $700k, and live there for a few years if not more.
Nobody wants to be rich, they all want to be middle class. Not sure where “high end middle class” ends and “upper class” begins, but even in CA, an income of just $659K puts you in the top 1%.
https://www.thecentersquare.com/california/an-annual-income-of-659-503-puts-you-in-the-top-1-of-earners-in/article_33c0ffaa-f854-11ea-9a85-23e1d537f550.html
That figure is $539K on average across the US.
https://www.usatoday.com/story/money/2020/07/01/how-much-you-need-to-make-to-be-in-the-1-in-every-state/112002276/
$162K gets you into the top 20% in California and $250K gets you into the top 5%. Hard to argue that’s middle class when you’re making more than 19/20 people.
https://www.thecentersquare.com/california/california-households-must-make-at-least-162-657-to-be-in-state-s-top-20/article_338af9e6-39d6-11eb-970d-93ae63633507.html
Nice post with facts. Top 5% isn’t really middle class.
While I agree that top 5% is not middle class I think places like NYC, LA and SF (to a lesser extent Miami, Boston, DC and Seattle) sort of defy conventional wisdom with respect to housing. There are a lot of people in these markets that are not earning income in a meaningful way but rather living off of previously acquired wealth. There are also lots of wealthy people who want a second or third home in these locations for the purposes of business travel or leisure.
As an example, we have a family friend who sold their business for ~$35 million about 7 years ago. He and his wife have homes in NYC, Miami and where we live in the Midwest. He’s not so wealthy that he can really afford to buy a $10 million mansion in his preferred vacation destination but also wealthy enough to afford multiple properties worth $1-3 million each. Further, this couple’s eldest daughter has an artistic career (read: make $10-12/hr) in a HCOL city. I’d still say she’s borderline upper class given the lifestyle that her parents allow her to live. Anyways, doctors in these markets are typically competing with people like our friend (and their daughter) for what is oftentimes a fixed supply of homes in well to do neighborhoods.
Again, I agree that $250,000/yr income is high but I also think “class” is more associated with wealth than income. In a HCOL area it’s not THAT hard to have high-income and be living a pretty modest upper middle class lifestyle.
It’s pretty hard to create new passive income streams when you don’t have any capital to invest.
Step 1 to becoming wealthy is having some excess funds to invest, that will grow with time. A person or a family who wants to be financially secure, who wants to build that wealth, has to do whatever it takes to live within their means. That will then allow them to start the process by having something extra each month to put to work.
For most docs, the only way to create those excess funds is to spend significantly less than they make. It’s not just within their means, it’s significantly less than their means.
What do these paycheck-to-paycheck physicians even buy that puts them in such a position…? I saw that someone mentioned buying too much house…. but are these physicians like blowing their money on cars, sports betting, stocks, etc…?
I totally agree. Cutting expenses for sure is an important aspect but gaining new streams of revenue would create freedom through abundance. Also highlights the power of geographic arbitrage…although I do understand there are many intangible reasons why this just isn’t an option for many
My one complaint about the numbers above- why did you use 30-40% effective tax rate? A married person making 250k would be at a 24% marginal (not effective) tax rate. While I agree with the sentiment of the article, the numbers should probably be different.
Also @ wci- my robot recapta expired while posting this- literally took me under 2 minutes. weird.
I’ll have the tech guy look into that. I also agree someone with $250K in income shouldn’t have a 30%+ income tax rate, even in CA.
True, although as per here: the expected MFJ tax rate at standard deductions is 28.5%. http://www.tax-rates.org/income-tax-calculator/?action=preload&ref=embed_refer_taxbrackets
Note that this includes FICA and California income taxes, and not just federal income taxes.
just plugged it into smart assets calculator for LA, California, married, 3 state exemptions (2 kids + wife), 19500 401 k deduction and it showed a total effective tax of 25.79, with the fed effective tax being 15%
This example highlights the financial difficulties of saving in California on a primary care salary alone. I live in the Bay Area, modest suburb good public schools. Most 3-4 bedroom houses my neighborhood cost 1-2 million and a condo is very small for a family of 4 for any long amount of time (I live in one). Private school expenses can easily be substituted for childcare expenses or babysitter/after school care expenses with kids that go to public school. I often feel like there is some financial shame in choosing to live in an expensive place, but this article does not project that which I like. I guess it is even more important to think outside the salary for financial stability.
Hard for Peter to shame himself! He lives in CA.
Older doctors had always told me you need to make more money. I thought 250 was great when I was a med student. Then one day a nephrologist told me that’s nothing. He did research in his office and made 600. An er doc told me if I don’t make 500 ide never save a dollar. A icu doctor told me if I want private school and to retire shoot for 700. Now I make 900 and live on 11000 a month. Only splurge is Porsche saving 40000 a month. Been doing it for 7 years. In 6 more years I will have 5 mil and retire. My secrets. Simple. Live on less. No private school. Tax free state. Buy the dip. Side hustles. Don’t work for hospitals. It works. I will be done at 55. Done.
Why is this going to take you 6 years? And how do you not have 5 mil already? If you only spend roughly 120k a year, having 5 mil isn’t going to do much more for you than 3. Sorry, maybe your tone came off harsh for me. Personal finance is tough for some people and living in Southern California doesn’t make it easy. You make some good points on how to improve the situation, but it’s doubtful money is only factor keeping them in California.
Had to pay off student loans several years first
Are you currently doing research? Also, if you do, how much more do you usually earn by doing research? thanks!
For example we were in one study we got $20000 per each patient that completed the protocol. The costs were minimal.
I prefer improving public schools over fleeing them, but if the doc’s spouse doesn’t work (and mental health and abilities permit) homeschooling is way cheaper than preschool and private school.
Its a great example, but shows how irresponsible this family is with money. I know houses in CA are expensive, but if that is the case, they should be living in an apt or condo. What is a family with an annual income of 250k doing living in a $1.5 million? They shouldn’t be living in a house/condo/apt more than at most around 600k.
Student loans and preschool, I empathize with that so I won’t argue about that, but private school? Living in CA on 250k and in a $1.5 million house. No way they can afford that, they should be in public school in a nice school district.
$250 a month on gas? Are they commuting to another state? I used to commute about 100 miles per day years ago and it still cost about half of that.
$800 for cars: I am assuming this includes repairs/maintenance. But this family is living in the clouds on their income. They should have one reliable car like a toyota and another slightly used car for the spouse to do her things. The spouse at home who is likely doing grocery shopping, dropping kids off places doesn’t need a brand new car as everything is within a few miles.
Also they are doing nothing to decrease taxes which can easily save them another couple thousand dollars per month.
So downsize to a 600k condo in a nice public school district, get rid of the private school, downgrade the cars to some slightly used/reliable toyotas or hondas and learn some simple tax strategies and this family will have an extra $6-8k per month to enjoy, invest, travel and save for early retirement.
Many docs live paycheck to paycheck because they want the millennial 9-5 lifestyle and/or allow someone else determine the size of that paycheck…after that employer subtracts a healthy sum from your efforts, for their passive piggy bank. Do that with a bunch of docs, then that CEO employer can live well below paycheck to paycheck, investing the difference then add more docs; all the while the docs grow the value of the employer’s business. Unlimited earnings potential for the employer while the docs are limited by the 24 hour day. Management 101.
A physician household earning $250K these days means spouse is likely an underachiever. Comes back to choices for a life partner. The wrong one may very well mean a paycheck to paycheck lifestyle.
This family would be better served geo-arbitraged in a lower tax /COLA state barring extended family ties that would keep them in CA.
Wasn’t this emd guy banned?
From where? The forum? I’d have to check with the mods. I can’t keep track of every person on every platform.
Really, it’s not hard to understand why many doctors live paycheck to paycheck. Income does not equate to wealth. Many doctors don’t manage cash flow well due to limited financial education. Consider a re-read of Rich Dad Poor Dad.
For these reasons, Robert Kiyosaki likens the physician to the well-educated Poor Dad that earns good money but struggles his whole life. The Rich Dad has the entrepreneurial rather than the employee mentality, amasses assets appreciating tax free rather than working for an annually taxed paycheck, pays others the paycheck who become a source of passive revenue for the employer – employees he notes that are paralyzed by fear of failure and greed that keeps them chasing the pay raise carrot. Emotion takes over reason in guiding decisions.
Wealth building takes a whole different mindset centered around one who manages risk (rather than always playing it safe) and is able to build businesses, succeed in real estate, welcomes failure as an opportunity to learn, manages debt to amass further assets, and welcomes failure as an opportunity to come back wiser. Everything compounds – business, real estate, income, decisions. No need to resign oneself to a paycheck to paycheck lifestyle.
These expenses are ludicrously high for that level of income. Yes, this Southern California, but consider that the median household income in LA county is about $70k. Somehow all those people are able to live there on less than a third of this family’s income.
The biggest problems that jump out are the house that costs 6 times their annual income and the expensive private schools. I have a very hard time believing that the public school associated with the $1.5 million house is not a good school.
$250k per year is a lot of income, far more than the large majority of people will ever earn, but it is not enough to buy the lavish lifestyle presented. This family needs to either dial back their spending expectations, find a way to make significantly more money, or move to a lower cost of living area.
Line by line suggestions:
Mortgage principal and property taxes ($6,978) – sell it and rent a cheaper place, half or 2/3 that price. I used to live San Diego (La Jolla actually) in the mid 2000s and paid about $700/month for my share of a nice 2 bedroom apartment. I don’t know what they cost now but I suspect you could find a 3-4 bedroom for a lot cheaper than what you’re paying.
Home or renters insurance ($100) – hard to cut anything from that.
Private school and preschool ($2,867) – eliminate that. Homeschool the kids. At most a few hundred a month for educational materials and a limited selection of high quality extracurricular activities. You said one parent (the doctor) is working. What is the spouse doing then that these children cannot be homeschooled?
Student loans ($1,763). You’ve got a ball and chain around your neck, and its only getting heavier. I differ from WCI in that I would recommend elimination this debt ASAP with your cost reduction savings. You are probably not going to be one of the few percent, or fraction of one percent, that actually gets this huge debt forgiven. When it’s gone, you can sleep better, too.
Disability ($500) – no suggestions. Good to have that one.
Car insurance ($250) – this seems expensive. I would get older and cheaper cars; consider carrying liability only. Or eliminate your cars as below. I live in an expensive car insurance state, costlier than in CA I think, and I pay about $160/month total for two cars, 5 and 8 years old.
Umbrella insurance ($40) – to protect what? I know, you’re buying it based upon future earning potential and a future where you may have significant assets…but it wont happen without big changes to your spending right now.
Life insurance ($100) – no suggestions. Good to have that one too.
Cell phone plan ($120) – absurd. Cut this to $40/month by switching to Ting’s basic plan. $40 even assumes that each child gets a line. Don’t use data.
Cars and gas ($1,050) – these seem like expensive cars, driven a lot. When you sell your house to move to a condo or apartment, go somewhere close where you can walk or bike to work, and get rid of at least one car. Maybe you can get rid of both cars, depending on how walkable the area is around your workplace, presence of grocery stores, mass transit, etc. However you settle your vehicle situation, pay for the vehicle(s) in cash, no loans.
Memberships for yoga, gym; and housecleaning (total $280) – eliminate all this. Totally unnecessary. You’re in southern California, so there’s plenty of exercise and relaxation available for free, outside in nature, year round. Let the spouse and the kids clean the house when not otherwise occupied homeschooling/learning.
Food ($1,800) – this is a hard one. We spend about $1,200/month for 5 people in the midwest, and eat a fairly fancy diet. You could consider going to east Asian or middle eastern grocery stores, if available. The prices there are often cheaper than the big retailers, and the quality is just as good or better.
I hope some of this helps you.
The problem with some of your suggestions is that they are completely theoretical and not realistic for a lot of people.
They are good low hanging fruit, easy responses if you were going about this with an extreme FIRE mentality as an exercise, but a few things are silly you mentioned.
The things you said with housing is fine but really just a couple things that I really disagree with you about:
Groceries: this is not a long-term solution to just switch to some Asian grocery store. People like and want to eat how they are going to eat and plus this is not a big deal just a couple hundred dollars more on food.
Memberships for yoga, gym and housekeeping: this is one of those easy FIRE answers of just get rid of it! But belonging to a nice gym you enjoy going to and doing yoga and staying healthy is the best investment you could possibly Make and I would guess increases the physical mental and spiritual well-being of this family. I am sure they enjoy the memberships and they enjoy the task of not cleaning and doing something else they enjoy with their time, in other words it increases their quality of life and all this for just a couple hundred dollars a month it is a no brainer to keep this.
Cars: getting rid of both cars and just biking everywhere is another simple FIRE answer that is not realistic for most people. Not everyone is Mr. money mustache. Some people do not want to bike to work or bike everywhere for whatever reason it may be it could be the weather, it could be physically they don’t feel like it it could be too much time whatever it is but it is unrealistic to just tell someone to get rid of all their cars much better to just buy a slightly used Toyota or Honda. Plus they might need the car to bring the kids to school or to make grocery runs or to bring them to different activities.
Private school and preschool: it doesn’t sound like you are a parent. Preschool can be very valuable for children in preparing them for kindergarten and improving their learning skills and socialization skills. I agree that private school is not necessary especially for this family and they need to just go to public school, but they just assume that because there is a parent at home they can take on the task of homeschooling is completely ridiculous. They might not want to, they might not have the ability to, and if they don’t have the interest and desire to they are going to do a good job the answer is obviously public school.
So in general the big picture problems are they have too much house, they aren’t doing any tax strategies and they are paying for private school and can also buy some slightly used cars.
Try not to make everything just a simple mindless FIRE exercise and instead try to actually put real people behind us.
It is completely unrealistic and ridiculous to assume that everybody is just going to homeschool their kids, stop eating the food that they like, getting rid of some small expense such as the gym or yoga or housekeeping which can significantly improve the quality of life for someone and sell all their cars and bike everywhere.
Living on the west coast, I can confirm these numbers are fairly accurate and typical for CA and WA (little cheaper to live in OR). As others have mentioned, $1.5M for a house on a $250k income is WAY too much. I think general rule of thumb 2-3x income for house. So that’s a 500-750k home.
To answer others – yes, you can buy a $1.5M house on the west coast and be in a bad school district. $22k for private school is cheap. Expensive private schools are around $50k/yr. not saying these are wise financial decisions, just saying that the original posters example is accurate for expenses.
Classic example of middle class trying to live like rich people. Keep in mind many rich grandparents or parents often pay the tuition or down payments on homes or just buy homes for kids cash. I did private school years ago and people were either poor and on financial aid. Middle class and broke. Or rich and subsidized by family money. If you are working and paying taxes and paying private school out of your after tax pay check you will never ever ever build wealth. Ever. Private school is for rich people. Rich means have 10 million in the bank. Or family pays. Where I live doctors 65-80 still work. Hard. That’s the point of fire. Avoiding that nightmare.
On first glace, some things stand out to me:
1. Is he getting the market rate on his pay? Can he look for a higher paying job?
2. As others have stated, too much house. I think that can be cut in half at a minimum.
3. Private school can’t be an option if you are living paycheck to paycheck.
4. Disability insurance at $500/month sounds high but I don’t know what all are the parameters affecting the rate in this particular case are. My wife got a $5000/month policy in 2014 for $1750 annual fee when she was 31 years old so that comes out to less than $150 a month.
5. Maybe explore moving out of California to a LCOL state? You are saving on state taxes and cost of living and I would guess salaries wouldn’t be too far off base. This may not be practical or even thought about as an option but should probably be considered now as a lot of people have thought about and done this since the pandemic. 250K will go a long way in a state like Texas. Even though people say property taxes are high, you could get the same house for 1/3rd the price and end up paying similar property taxes in absolute terms. Me and my wife lived in a $700 apartment during her residency and fellowship saving enough during that time for a down payment to a 350K newly constructed 3000 sq feet house with a 3% 15 yr mortgage in late 2016. Ofcourse, things are more expensive now we’re talking about a market rate of $450K for the same kind of house if it were constructed now with a 2.5% interest rate. My wife started her ortho job with a $400K salary in late 2016 and we’ve now accumulated over $2.25m in networth and reached a point where our networth grows by as much as our combined salaries every year and I forecast it to increase every year depending on the market. That initial life style decision to save on costs and save/invest as much as possible made all the difference and much of it was possible because we lived in a LCOL place.
What ever happened to living beneath your means
Wealth for docs is mainly from their retirement plans
Not a great amount needed monthly to create a multi million Ira account
Keep it simple
My biggest expense is certainly taxes. I think with federal, state, FICA, Medicare surtax…it’s about $10,000 a month.
My next largest expense is retirement savings at about $6000 per month. My employer kicks in another $1500 per month matching funds.
My third largest annual expense USED to be private school ($22,000) college tuition ($17,000) and 529 accounts ($12,000), but COVID-19 killed my kids private school. So in 2020, we drove them across town to the best public school within 20 miles.
My side gig working 20-25 weekends a year, taking call two nights a week, and covering four holidays brings in 50% of my regular pay.
During COVID, we were flush with unspent private school, vacation, and restaurant dollars so we put $40,000 into our retirement home.
After selling the McMansion in 2022, our two home existence drops to one and with the kids college funds now topped off, our after tax expenses drop from $15,000 a month to about half of that.
The biggest savings will come from paying a LOT less in income taxes, including a drop in property taxes from $11,000 to about $3500…but the retirement home is on 25 acres on a mountain.
I think the roughly $20,000 a year we spent on private school was the largest discretionary expense we had for two decades, but we also spent $10,000 a year on family vacations. Those two certainly delayed retirement, as did building a half million dollar home in 2003 and choosing to have four children and pay for their college.
It’s all about choices. My side gig allowed my to save MUCH more for retirement, but I’ve worked a heck of a lot of weekends and holidays since 2008.