Category: finance

Growing your net worth by controlling your expenses – Introduction

Posted on by SmartMoneyMD

This article serves as the beginning of a series on growing your net worth without having to increase your income.

 

While you are building your medical practice and getting out of debt, your net income from your job may not rise.  It takes years to acquire patients and vest into a practice.  You may be in a permanently employed position where your salary may never increase. As insurance reimbursements tighten, you income as a physician may actually decrease!

All isn’t lost, however. You can still grow your net worth during these times. Invoke the strategies that you used during residency to survive. One foundation for growing your net worth is to control your costs.  The lessons you learn from cutting costs help regardless of income. As you rise from poverty to upper middle class, the same principles apply.

The toughest aspect of each step of income transition for a doctor is that the time and effort we’ve invested in our training and education revolves around delayed gratification. Now that I’m making $43,000 while working 77 hours a week, can I afford Loubs? Do I go for the jumbo mortgage McMansion now that I am an attending? These are real questions that doctors go through. Practicality often comes in second to idealism.

The problem with doctors is that once we obtain a good income, most of us do not do a great job converting it to net worth. It is also easy to assume that the good income stream doesn’t end either. Unexpected events do occur. Your hospital may cut its staff. Your practice may employ you for two years and then decide to make partnership unattainable. You lose your job, have to relocate your family thousands of miles away, and start over. Without a net worth to buffer life changes, your decade of hard work may become fruitless.

Don’t let this happen to you. Develop a strategy to control your costs while you grow your net worth. Make your money work harder than you. Read on to see what strategies I’ve used to help grow my net worth.

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Have you gone through life changes in your physician career? Comment below!

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How to make a doctor’s salary and still feel poor—and how to fix it

Posted on by SmartMoneyMD

how to make a doctors salary and still be poorDespite earning a good six-figure salary, most doctors never become rich for several reasons:

  1. The government penalizes big W2 incomes. That’s where most employed physicians earn their income. They spend a decade accumulating debt while earning a pittance of a stipend only to be hit by the upper federal income tax brackets. It would be better to earn a salary of $90,000 for ten years than to earn nothing for four years, $45,000 for four years, and then $240,000 for three years. Expensive states like New York, Massachusetts, or California will hit you with higher taxes, cost of daily living, and property costs.
  2. You have less time time for your savings to accumulate.
  3. Lifestyle creep.

 

That’s right. Lifestyle creep. It usually goes one way—up. And it’s much easier to adjust your lifestyle up to your salary than it is to adjust down. And doctors are prone to adjusting upward. Their jobs are stressful.  Patients die. Patient sue. Insurance companies make absurd cuts in reimbursements. As professionals, they are expected by society to have wealth.  Retail therapy is a common coping mechanism to justify the challenging career.

Imagine that a single physician earns $240,000 a year in W2 salary while living in Boston. Assuming roughly a 35% net federal and state income tax, she takes home $156,000 annually. A rough estimate of expenses might be:

  • $3500/month for a 1BR condo by City Hall.
  • $500/month for utilities, cable, internet. Maybe including cellphone bills.
  • $1400/month for food and restaurants
  • $1500/year for clothing
  • $6000/year for disability insurance
  • $22,000/year professional insurance, malpractice.
  • $7200/year for car lease (Mercedes)
  • $1200/year for car insurance
  • $5000/year gas
  • $5000/year vacation

That adds up to $112,700 in living expenses or $43,300 in leftover money for everything else.  Note that I did not include miscellaneous expenses, hobbies, or other entertainment costs either.  If she were to invest or save then entire amount annually, it would take over 20 years at this rate to accumulate over $1 million!

If you include family, kids, and education expenses, there really is not much left over to save. For a busy physician, there are limited hours to increase her income through her primary line of work or even branch into a second income stream. I know people who have done it, but personal time suffers.

The logical solution in this scenario is to cut the lifestyle creep. This is one variable that can be controlled immediately and positively impact your net worth immediately. There are plenty of people who do not earn doctor salaries who are rich. They accumulate net worth through diligent use of their money and time. Find out what maximizes your happiness. You might enjoy one fancy vacation per year but could do without the $80,000 gas-guzzling-money-pit vehicle. Or perhaps your recreation of choice is exercise—this is an activity that could be low cost and be beneficial to your health.

What are your interests that maximizes happiness? What lifestyle choices could you eliminate and still be content? Sound out below!

(Photo courtesy of Flickr)

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Stealth Wealth: Keeping Your Money Invisible

Posted on by SmartMoneyMD

Without a doubt, one of the first thoughts that comes to a layperson’s mind when she thinks of ‘doctor’ is “wealth”. With doctors being historically stereotyped in well-dressed in professional attire, driving fancy cars, living in fancy houses, and large bill statements sent to patients, it is expected that doctors belong in the top 1% of America’s wealth. After all, would you want your doctor to be wearing Tevas (socks optional), a loud Aloha shirt, and driving a 20 year old Ford truck? Little do people know that doctors are not paid enough for their services, are at least a decade in financial health behind their peers, and also are unlikely have significant wealth.

Landscaping business owners, software developers, and plumbers—all of whom may have a sizable net worth—are not “expected” to portray wealth. Neither does the guy who wears torn jeans, a t-shirt, and a Hublot watch but owns several factories in Asia. Stealth wealth is easier to pull off in these scenarios.

The only thing worse than being viewed as a wealthy doctor is to actually be poor while appearing wealthy. For this reason alone, it may be worthwhile as a doctor to consider walking in the shadows for once. Below are some pros for doing so:

Pros:

  1. Service industries will take advantage of you less. I was once at a chain brake repair garage having the brake pads on my 9 year old Impreza replaced. Another customer came in with a sub-3 year old Infiniti SUV to have an oil change was offered a “free” brake inspection and was talked into an urgent replacement of his timing belt. For those of you unfamiliar with vehicle maintenance, the likelihood of a timing belt needing replacement before year 5 is exceeding low. My timing belt at 9 years is nearing replacement, but still thick enough to function.
  2. Jealousy from friends and even family can manifest when money is involved. Do you really deserve being wealthy? Oh of course she can afford that, she’s a doctor. You will be judged and criticized even more if you’re rich.
  3. Solicitors will find you no matter what. If you make yourself a bigger target go ahead.

Comments or anecdotes on reasons why you keep your wealth invisible or tips to do so? Shout it out below!

 

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Do you have the traits of a financially prepared physician?

Posted on by SmartMoneyMD

The AMA recently released a paper (more like a survey result) of the top 6 traits of a financially prepared female physician. It probably would be the same list regardless of gender…

I do agree with most of the survey results, but I think that we can really do better. Point number 4 states that two out of three “financially prepared” doctors have a financial advisor. I also believe the converse—you do not have to have a financial advisor in order to be “financially prepared”. It certainly gives us piece of mind to have a “professional” helping us, but Jim Dahle, an ER physician who runs White Coat Investor, has been a strong DIY advocate. I am probably more on the neutral side, although I can think of a few reasons why a financial advisor might work for you:

  • You work 88 hours a week as a vascular surgeon, and frankly have no time to figure out the basics of your finances.
  • You want to build a nest egg, but really do not have any desire to spend any time with financials and only want to be informed of good choices you can make.
  • You put all your money in a Robo-investor firm, but need someone to help guide the planning and protection aspects of your finances (insurance, trusts…etc)

The subject of financial advisors is long and can belong in a series of books, but feel free to comment if you have questions or ideas.

The fundamental tenant of being financially prepared is to have a good idea of your annual living expenses, your current income and income potential, and action plan to have adequate finances to support your future living expenses after retirement plus something extra to leave to heirs if you wish. Yes, this is a loaded condition, but I have confidence that it can be achieved (and certainly has been by others).

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If you have questions, please comment below! – Smart Money MD

Should I marry my partner if he has debt?

Posted on by SmartMoneyMD

Does your partner have debt?I am always surprised when I hear this question. Yes, there is something inherent wrong about asking this question with a straight face but apparently this is a serious question for many.

There is some merit in addressing the practical side of this question, however. I think the logical approach would be to explore the issue more thoroughly and determine if there is a solution:

 

How did you acquire this debt? 

There is difference between consumer debt and educational debt. Consumer debt typically comes in the form of credit card debt, layaway items, and other means of borrowing money to for recreational items or vacations. I would be more forgiving of educational debt since most consumer debt is not intended to further your future self. After all, education debt is supposed to be an investment into your future, right? 😉

It also makes a difference if your educational debt was acquired from a degree in web design at a for-profit online “universities” or a medical degree at a reputable school. That helps us figure out how  to eliminate debt. This brings us to our next question.

 

Do you have a plan to eliminate this debt?

If your six-figure debt was from medical school, then logically you should have relatively easy (albeit disciplined) means to get rid of it, because hopefully you will have a decent income. It would also be nice if you have thought out how you plan to eliminate this debt (i.e. which loans to repay first, how quickly you can repay them, and approximate time frame to do so.

 

Are you willing to eliminate this debt? 

This is more important than the previous question. As long as you are willing to ask for help and modify your lifestyle as needed to cut the debt, you are salvageable! Are you also willing to prevent acquiring similar debt in the future?

 

Do you have habits that can contribute towards debt, and can you modify your lifestyle without sacrificing your happiness? 

Loaded question, but if you had to ask the first one, you might as well ask this one.

Comments or suggestions? Comment below!

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Frugal vs cheap – doctor edition

Posted on by SmartMoneyMD

There are many articles on the web that argue the differences between frugality and cheapness. One of my favorite summaries include one article by Mr. Money Mustache. Much of his ramblings are applicable to all walks of life.

For professionals such as doctors, there is a strong emphasis on presentability. If you want to be frugal, you have to make sure you don’t look cheap.

The rule of thumb on material wealth is to have enough to sustain happiness, but not in excess. The criterion for every person will be different, but as a doctor or high income professional you probably will have a more lenient threshold before you result in financial bankruptcy (but there are plenty of doctors that end up in financial ruin).

 

Clothing: This is where you can go buck wild with your expenditures. You have to look like a doctor right? Some frugal suggestions that I have been given and tried over the years include:

  • Men and women: air dry blouses, dress shirts, and dresses. Some dry clean only clothing can be hand washed or spot cleaned. Remember, you probably aren’t waddling in mud during the day. Press your own clothing.
  • Great resources for discount fashionable clothing include: Nordstrom Rack, Ross, and even Goodwill.

 

Cars: I’ve concluded that the appearance of a doctor’s car matters very little. I’ve seen internists with high-end German luxury cars, and vascular surgeons with 13 year old pickup trucks. The key is to have a reliable car that is well-maintained.

  • A new car will depreciate immediately it leaves the dealer’s lot. Most cars depreciate 40% over 3 years. By 5 years, the car will lose approximately 60% its original value. Fancy cars like the Mercedes AMG63 depreciate about 50-60% over 3 years. Think about it, there aren’t too many fancy toys that you buy for $100,000, plow through 15 miles/gal of premium gas, cost a ton to maintain, and be worth only $50,000 after 3 years.
  • Go for a reliable, used car. Get a fancier one once you cash in your first million, and maybe a fancier one once you become financially independent. (yes, high income people like to work with big numbers).

 

House:

  • Unless you entertain frequently, the size of your house is dependent upon your personal and family preferences. Make sure you don’t buy more house than you can chew (like taking out a jumbo mortgage before you are truly settled in your practice).
  • Profitability from buying a house will be limited to the market and also how long you plan to stay in the area.
  • Obviously if you have a family and kids, you will want to look at the appropriate school district to send your kids to school. I’ve met people who toil over what school districts are best, pay top dollar for a house in the area, and end up sending their kids to private school. Not the most financially brightest decision, I might say.

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Lifestyle: I would say that if your “frugal” lifestyle choices don’t disrupt others or embarrass you, your family, or others, go for it:

  • Opt for OTA television channels versus cable/satellite channels. You can save good deal of money long term by cutting the monthly fees, assuming that you aren’t a television junkie.
  • Exercising at a home gym, outdoors, or even through home chores can save you time and money over a gym membership.
  • Be careful about hypermiling. Yes, you can save on gas, but do you really want to piss off other drivers on the road? If no one is behind you, go on ahead. Otherwise, be wary of your surroundings (which you are anyway if you hypermile)
  • If you decide to bike to work or on errands, be mindful of the traffic around you. I’ve seen plenty of bikers using the main road (speed limit 55mph) with a Class I bike lane that is parallel to it. I guess those bikers like to be on the same road as a Hummer. I wouldn’t.

 

Comments or suggestions? Please sound out below!

Doctors are more than 10 years of income behind their peers

Posted on by SmartMoneyMD

Think about it. You spend at least four years in college, four years in medical school, and between three to seven years in residency and fellowship to actually practice medicine. If you take a year off for research or work in between college and medical school, you add a few more years into the mix. I even had a few classmates who started medical school in their late 20’s or even early 30’s!

Thus, most doctors aren’t able to generate a six-figure salary until they are in their 30’s—at least ten years behind most other career choices. A recent thread on Corporette had a few anonymous posts on net worth. One stuck out in my mind:

“$1.7mil by 37. $120k annual earnings.”

This author is unlikely a doctor because a doctor is unlikely to be able to accumulate such net worth in the short amount of time (maybe 6 years). Actually, according to the American Medical Association, a significant number (41%) of doctors have less than $500,000 in savings. This includes the 35 year old newly minted electrophysiologist and the 66 year old general surgeon who is twice divorced with three mortgages and a taste in fine European gas guzzlers. That is scary.

As top income earners in their 30’s and beyond who spent their 20’s accumulating negative net worth, doctors lose the advantage of at least a decade of compound interest. For instance, $100 accumulating at an annual 5% compound interest will have $163 in 10 years. Add a few zeros into the mix, and you realize how quickly ten years can add up.

Sure, a doctor can catch up in time, but many doctors never catch up due to lifestyle creep. Don’t let that happen to you. Follow SmartMoneyMD and learn how to get your net worth in line.

Questions? Sound out below!

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