One of the goals of establishing financial security is to have an adequate net worth to sustain our living. In order to get there, we invest in vehicles to grow what we have saved. If we choose (and most doctors don’t really have to), we can also establish streams of passive income (shout out to @PassiveIncomeMD) as a means of cash flow. For most of us, getting to that gratifying number will take time and effort. As physicians, we no strangers of delayed gratification. It is no fun.
The journey to financial security will likely span much of our younger years, so it is important not to lose sight of the present. Amidst the stresses of healthcare changes, we should focus on what we can control. Doctors need to be able to control our happiness while we are building our financial security. This starts the moment we commit ourselves to a financial strategy. A simple strategy to approach happiness is to stay ahead of the curve. We did it all through college and medical school. In finance, we can view this in two ways:
Expenses as a Percentage of Net Worth
Aspirational early retirees rejoice! This is the same formula that we use to determine when we reach financial independence. If you use the oft-butchered 3-4% safe-withdrawal rate as a reference, you can roughly determine your financial progress.
For instance if you spend $10,000 a year, save $10,000 a year, and have $100,000 in net worth, you should be able to reach a 4% safe withdrawal goal rate ($250,000) within 15 years. How happy would you be if it’ll take you 15 years to reach your financial goals?
The longer it will take to reach your goals, the less happy you will likely be. For the mathematically inclined:
Happiness ∝ 1 / (Number of years to FI)
If you throw expenses and percentage of net worth into the mix, you can make some more equations:
Happiness ∝ Net worth / Expenses
If you don’t care much for distilling life into a core set of math equations, just realize that the more your expenses dig into your net worth, the less happy you will be. As you are building your net worth, stay happy by watching your expenses.
Expenses as a Percentage of Income
I find that tracking expenses as a percentage of net income a more manageable approach to happiness. As long as you can keep that ratio low, you know that you are working towards your financial goals.
Another way to look at this method is simply your savings rate—the higher your savings rate, the sooner you ought to be reaching your financial goals. Most financial professionals that I speak to strongly recommend saving at least 20% of your income. (Pretax or post tax, no one ever specifies!) This also means spending 80% of your income. As I have progressed throughout my career, I’ve discovered that percentage of income spent has translated to increased happiness. There was a minimum threshold that I needed to exceed, which was anything beyond my residency and fellowship income. Afterward, the closer I became to a net zero net worth (repayment of student loans) the happier I became. Setting realistic goals and achieving them allowed me to sustain my financial happiness. As each one of my mini-goals was reached, I’ve found that lowering my expenses as a percentage of my net income has helped remind me that I was succeeding in reaching financial independence.
That caveat is that this method is going to look a whole lot better for people with high incomes. The key is that each one of us is going to have a different savings velocity. The key in happiness is not to treat our earnings and savings as an arms race with others—as long as we are progressing according to our means, we are doing well and living a healthy lifestyle in the process.
How do you track your happiness?