Month: April 2015

Your car determines your savings level

You think that as a high income earner, you have the luxury of splurge purchases. You do, but these expenses do cut into your savings rate, much more than you’d think.

Suppose you decide to buy a luxury weekend car that is fitting for a hotshot doctor: The Mercedes E63 AMG. 550 horsepower in a V8 engine. You can probably get a little over 20mpg on the highway. If you buy it from the dealer and get a deal, you might be able to get for around $100,000 out the door. If you are a deal finder and troll eBay for a used model, you might be able to get a 3 year old model for around $60,000. A deal, right?

With an excellent credit score, you could even score a great interest rate. A $60,000 vehicle could be financed for 5 years at around $1,000 a month.

Maybe add in a few thousand dollars a year for insurance and maintenance costs, the fancy weekend car is still worth it!  Premium gas at $3.60/gal and a lousy fuel economy will also add few thousand dollars a year to the upkeep.

As a doctor with an income of over $10,000 a month, you can surely afford a splurge. Maintaining a luxury car might only cost you $1,500 a month for 5 years, and then drops off precipitously after you pay off the car. That’s an annual cost of only $18,000!

Back to reality though: your $18,000 comes at a cost of post-tax dollars. Remember our previous article, you have to earn quite a bit more than that in order to pay for the car. If equivalent pre-tax dollars are used, you can fund an entire 401k/403b for an entire year.

The decision is yours whether you think that you can afford the luxury. Take a look at AMA’s Physician Survey data, and then you start wondering how high income physicians still have a relatively low net worth.

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Doctors are not paid enough for their services

There has been a public belief for decades that doctors are among the wealthiest in the country, and that they are overpaid for their services. Those who care to pay attention to the evolution of the health system are also aware that payments for physician services have progressively slashed by insurers.

That being said, the majority of my patients still have a poor understanding about how doctors are paid and the work that goes into being a healthcare provider. I have overheard comments from patients that go along the lines of this:

“These doctors spend less than 10 minutes with me and I get hit with a bill for a few hundred dollars. They have it all good.”

“She always wears such fancy clothes. Docs have so much money.”

“I work just as hard as this doc. Why does she get paid so much more than me?”

While this is just a slice of what I’ve only heard, it is clear that much of this stems of ignorance. I will analyze the topics to clear the air:

1. What you see on your bill is not what your doctor gets to keep. For instance, you may see what your doctor billed your insurance company $300 for your care. In a fee-for-service model, the contracted rate may only be $130. The billing company may then take another 3-5% for its services in helping the doctor collect from the insurance company. If the doctor is unlucky, the insurance company may even deny/reject a claim due to documentation issues and get nothing. After everything is done, the practice collects maybe $125. That amount goes toward paying for the clinic’s utilities, front desk person, technician, computer systems, diagnostic equipment, cleaning services, and all other costs relating to operating the clinic. I’ve seen practices with operational costs in the 90+% range. If your doctor is employed by the practice, another cut may be taken out by the practice owners. Maybe if your doctor is reimbursed more appropriately, then she might actually have more time to spend with you.

2. While it is your doctor’s own business what she wears to work, would you consider your doctor to be less competent if she were disheveled and wore dirty clothes? What if the fancy-appearing clothing were actually purchased third-hand at a thrift shop? I have certainly had patients with life-threatening medical conditions who refused to pay the $20 copay but was willing to own fancy iPhones, Ray-Ban sunglasses, bling, or even get $100 massages. Ultimately it all lies in where your priorities are.

3. There are very few good paying occupations that aren’t challenging in some form (physical or mental). As a plumber I can bill for $100 an hour and even include the time it takes me to find a part that I need in the store (and I can charge you for the part). The 30 seconds of medical decision making that a doctor undergoes took many years (a decade) of sacrifices to learn. Even after making that decision, there are still ramifications that has to be considered. It doesn’t end. Obviously there is a price placed on a doctor’s ability. There’s also a fine line to what a doctor is worth. What should be known is that if that value of a doctor is discounted enough, those who are most competent will quit.

Comments? Questions? Sound out below!

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41% of all doctors have less than $500,000 in savings

You would think that the majority of doctors are financially well off, but in fact, they are not. According to the AMA 2013 Physician Financial Preparedness Survey, only 41% of all physicians average less than $500,000 in retirement savings. In fact, of the physicians surveyed, the majority (56%) of those under age 40 had an average retirement savings under $100,000! That is disturbing. In comparison, Whitecoatinvestor had a net worth that exceeded $1,000,000 before he reached age 40!

Given that the average doctor should earn more than $100,000 annually, it is natural to assume that she would have more than that amount after a decade of working (assuming starting at age 30). The fact that there still is such a discrepancy become income, net worth, and retirement savings signifies that doctors are not probably not saving enough for retirement. Actually, the top financial concern of all physicians was whether they had enough to retire.

In actuality, financial stability is achievable for all physicians—you don’t even have to spend every waking second of your time managing your finances. BUT, you do have to pay attention to your expenses and allocate your earnings appropriately.


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Assessing how much a doctor is worth

In previous posts we discussed the basics of doctor reimbursement. How does that translate into your take-home income? In this case, how much you get paid as a doctor is exactly how any other business works.

In the broadest sense, the owner gets the leftover sum after all of the employees are paid and all operational expenses are paid (rent, utilities, supply costs, equipment rentals…etc). If the doctor is the owner of an outpatient practice, it pays to watch expenses especially since the revenue a practice is pegged against insurance reimbursements (unless you run a cash practice or have ancillary income). Since insurance reimbursements aren’t really going to rise, the only way you can truly earn more is to work more.

In a hospital setting, the physicians are generally employees or contractors of the hospital. The hospital will often set a fixed salary for its employee physicians with the understanding that each physician will be able to generate a certain number of RVUs (and revenue). As contractors to a hospital, a physician group also negotiates a set income for a contracted number of RVUs generated.

The first step in understanding how much you are worth goes along with how much revenue you can generate in your field, the general operational costs required to run your practice, and/or the going rate for physicians in your region of the country. If you are an employed physician, understand that the owner of a practice will charge you an “opportunity cost” for having support facilities and patients that you don’t have to recruit.

Take home points:

  1. Learn how much revenue you can bring into the practice given the hours worked.
  2. Figure out the average revenue a specialist in your field brings in.
  3. Learn about the operational costs that an average practice in your field incurs.
  4. Compare that operational cost to a practice that you are negotiating with.

Questions? Sound out below!


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How often do I need to inspect my brakes?

Brake maintenance is a critical part of keeping your car functioning. After all, no brakes = bad. In general, you should inspect the brake pads on a routine schedule (or have your car guy do it). the maintenance schedule for every vehicle is listed in the owner’s manual of your car—you can often find the charts posted online. Usually this depends on how hard you abuse your brakes—they may last up to 35k miles or as little as 10k miles. As a rule of thumb, brake pads on a manual transmission car tend to last slightly longer than those on an automatic transmission.

How brakes work is no mystery; most brakes consist of a rotor that spins along with your wheels:

Brake rotor

There are also brake pads contained within a housing that makes contact with the rotor when you depress the brakes:

brake pad with rotor - Flickr

After many years of use, the brake pads eventually become worn out and will start to scrape on the rotor. This is bad. It is recommended that you replace your brake pads before your rotors become destroyed.

Since brake changes are relatively time consuming, I have been putting off brake maintenance. I only have less than 70,000 miles on my 9 year old vehicle, but it looks like my brakes are worn:

Subaru Impreza 2006 worn rotor

Scratched Subaru Impreza 2006 rotors

Obviously I had been so negligent that my brake rotors have pretty bad scratches. In general, brake pads can cost less than $50 for a pair of generic ceramics while rotors cost around $100. If there is still enough tread on the rotors, then they can be polished for $10-$15 apiece. Your neighborhood dealer will charge upwards of $600 for replacement of four brakes depending on how fancy your car is. In my experience, it’s about a 2 hour job if you know what you’re doing. How about that for an hourly rate?

Be smart about where you put your money!


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Do I have enough income to save and still live comfortably?

As a greenhorn doctor, do you have enough earnings to sustain all of your financial goals? You sure do! Ultimately the equation only works if you spend less than you make. Aside from that, living within a modest budget should get you to your goals. Remember, your income is in the upper 5% of all household incomes in the United States, and likely much higher than that of many equivalent doctors elsewhere in the world. Sure, the CEO or random administrator at your neighborhood hospital probably earns more than you do and works less than you do with less liability, but that is life. You will still do fine until you come up with a killer application and strike it rich.

Let’s go through an example:

Suppose you have an annual salary of $200,000. Assuming that you contribute to your 401k completely ($18,000), you have a $182,000 taxable income. Suppose that you are in the 25% effective tax bracket (state and federal included). Your take-home income should be around $136,500. Let’s maximize the Roth IRA at $5,500.

You now have $131,000 for living expenses (rent, mortgage, food, vacations, recreation), insurance (disability, umbrella, life), loan repayments, and further investments. Suppose that you live on a generous $80,000. (Remember, you are a new doctor and lived on half that amount for the past 5+ years. You still have $51,000 left.

That amount should be used to eliminate your loans and place into further investments. If you assume that there is no appreciation or loss in your annual investments, you will have a hefty sum of $745,000 combining your 401k, Roth IRA, and taxable investments. That is not an insignificant number. Obviously there are many additional variables in the equation that can influence your final number (not all of the $$$ in your 401k belongs to you, you might get a raise, your expenditures can increase…etc), but the point is that you can still save, repay loans, and live comfortably on a doctor’s salary.

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Any other questions or comments to add? Sound out below!

What is a jumbo loan and how it applies to doctors

jumbo loan for mansionsAs a newly minted doctor, your many years of hard labor are now paying off. You have a salary, and you’re now itching to get the new house you’ve always dreaming of owning. Maybe it’s the million dollar home that your non-professional husband has been eyeing for the past decade. While there are many practical considerations of even getting a McMansion, one term that you should familiarize yourself with is jumbo loan. 

For most people, you will not be buying a house in cash. You will be taking out a loan, perhaps with a standard 20% down payment. So if you buy a $1 million home, you are asking for an $800,000 mortgage. Guess what, in most places in the United States, any loan greater than $417,000 becomes a jumbo loan.

A jumbo loan is simply a larger loan. If you live in a high cost of living area like California, New York, or Connecticut, you’ll probably need a jumbo loan anyway to afford the housing. Here is a list of top considerations for jumbo loans:

  1. You will have a higher interest rate. Large loans have higher risk, and thus you will likely have to pay an extra 0.5-1%.
  2. If your first job doesn’t work out or you don’t make partner and have to move, you’re out of luck. It’s going to be more difficult to sell an expensive house.
  3. Make sure that you can afford the higher monthly payment. Remember, you make more as an attending than as a resident, but you likely have greater expenses now.
  4. The value of your house can go down. Your mortgage can go underwater, and it would be difficult to refinance in the future.
  5. Pay attention to the private mortgage insurance (PMI) requirements. Before your McMansion accumulates equity, you will have to pay PMI. Certain lenders will allow you to terminate PMI after you achieve a certain amount of equity.

Any more suggestions? Sound out below!

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