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How I became rich by doing my job

Posted on December 1, 2018January 30, 2021 by SmartMoneyMD

Put your head down and do the work. This is the motto that medical students should have learned. Get through medical school and residency with a similarly positive attitude, and you will be fine. Skimp on the details if you’re short on time, but in the end you are still short-changing yourself. The unspoken assumption in medicine, however, is that as long as you work hard and don’t cut corners good karma will come your way. Be nice to your patients, treat them as if they were your mother, and you will achieve greatness.

You don’t have to be nice to get rich

If the rest of the world were sanctioned by the Hippocratic oath, then doctors would rule. Years ago when I interviewed for a job in the tech startup world, the second question I was asked (after how I intended to change the world) was how I could harness certain technologies to capture greater market share and profits for the company. The goal in startups is to generate enough momentum to continue through several rounds of funding, with the eventual hope that the technology becomes acquired by a larger company. The financial world is even more brutal—extract the maximum amount of profit out of your customers, gain market share, and get an annual bonus that could be more than twice your base salary.

We have too many options

Knowing not to invest too much of your earnings into alternative means is worth discussing. Having too many options can be detrimental. If given options, it is normal for analytical folks (most doctors) to spend too much time getting lost in the forest. A little bit of knowledge can be dangerous.

Having a life sized die cast aluminum sculpture of Sparky would not be considered boring

One of the more common financial decisions that doctors end up making is choosing between two potentially inconsequential outcomes:

Repay loans vs save for mortgage down payment
Repay loans vs invest
Moving low-cost investments to other low-cost investments

Then there are bigger financial decisions that might turn out to make a larger impact on your financial future:

Deciding to buy a nice house in an “A” school district in hopes of getting better resale value in 15 years.
Contributing a decent chunk of potential retirement savings towards speculative real estate investments that might turn out to be amazing investments (or might not).
Spending your free time with “side hustles” that focus on building ancillary income. It may result in a wildly successful business that could supplant your medical practice (or fail miserably).

Any financial decisions that we make, whether trivial or potentially financially impacting, consumes our time and energy. Unless choosing between a multitude of options is your cup of tea, we all have to remember that we could all benefit from putting our energy towards

Doctors can focus on the basics

Fortunately the formula for wealth can be a lot simpler for doctors, since society still is able to afford us relatively high incomes for demanding professions. The key is to avoid making too many long term financial decisions that chip away your earning power. As a recap, doctors can build their wealth by taking note of the following:

Save a fixed amount of your earnings. Many people recommend saving 20% of your income, others more. I would like to save more than that, and gauge based on post-tax income if you can.
Maximize your retirement accounts.
Grow your expenses slowly as your net worth grows.
If you decide that you have to find alternative investment schemes, don’t put all your eggs in one basket.

You might also like: The key to physician success: it’s okay to be missing out

I live a boring life, and my bank account shows it

At this point, people are expecting net worth graphs and numbers. If you are the numbers type, then here is a graph with arbitrary numbers but a similar trajectory that most doctors should be able to achieve:

Don’t you love it when you’re retired and the stock market moves like this?

The truth is that anyone with a solid six-figure income can build a stable net worth relatively quickly. Without any strategic tax wizardry, an average physician with a mediocre salary of $225,000 in Houston, TX may take home $181,000 in 2018 (effective tax rate of ~24%). Even after spending $100,000, she will have roughly $80,000 (36% savings rate with a post-tax numerator on a pretax denominator) to put away. With relatively conservative investment projections, she should be able to have at least $1 million after a decade of “boring investing”.

Not bad, right?

Most doctors ought to be able to build up at least a $1 million net worth after a decade of practice. If you haven’t reached that milestone already, consider making it one of your goals!

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A doctor’s account on the negative impact of commuting

Posted on October 6, 2018January 30, 2021 by SmartMoneyMD

As we get older, time becomes are more valuable commodity. I clearly remember that as a college student, I was more than willing to wait in line for over an hour simply to get a free sandwich promotion. Nowadays, I’m not even too interested in waiting 20 minutes to be seated at a restaurant. Our priorities evolve.

One interesting aspect of time that remains relatively unchanged over time is our tolerance of commutes. We commute to and from work almost daily, and whether or not we like it, we do it. We have gone through great lengths to even justify the commutes:

“There’s no way I’d want to live near the hospital I work”
“Junior needs to be in a good school district”
“There aren’t any good home options near the office”
“Housing near the clinic is too expensive”

Most of my colleagues commute at least one hour each day for work purposes. Those who have to commute between offices easily add on another 30-45 minutes to the schedule. One of the recent reports on average commutes shows that one hour expected for everyone living in the Northeast corridor or California, regardless of profession. That’s about five hours of commuting every week, or 240 hours on a 48 working week calendar! Ten days in the car! If you took public transit, you’d easily double that. If you took call on the weekends, you’d clock in another day in the car each year!

Commuters are essentially funding the audiobook and podcast industry by virtue of finding ways to occupy their time between the points A and B!

Commuting and your health

I used to sleep on the subway during my commute. I didn’t really have much of a choice. It was a vicious cycle where I lived far away from work, slept less because the commute was long, and ended up getting poor sleep on the train. By the time I got home, I was exhausted from work and the commute. After preparing slides for grand rounds and working on some research papers, any motivation to eat healthily or to hit the gym was essentially put on hold. We all know the ill effects of a sedentary lifestyle. There are zero health benefits of a long commute.

Commuting and your wallet

It is an interesting exercise to calculate your average hourly wage from the moment that you start the day in preparing to get to work until you get home after work. If you get up at 5:50am to get ready for work and step back home at 7pm, your workday is essentially 13 hours. If you are only getting paid for 8 hours, you’re essentially “working” 62.5% more than what is reflected on your paycheck. If you end up bringing charts home to finish after you put your kids to bed, you’re adding to the work hours too. For each hour of “unproductive” commute, you are discounting your services by 12.5% on an eight-hour workday.

No commute, no net worth, but happy as hell.

How these numbers actually reflect your finances ultimately depends on how much you value your time. The premise goes back to the promotional sandwich experience in college. When you have no net worth, are living life on a loan, and have no active earning power, your time isn’t worth much. One would expect that our value on time will increase in an “S” shaped curve over time. If you are early in your career, you might have to bite the bullet and take these onerous commutes until you reach a position to negotiate a more favorable situation. Once you have reached fatFIRE, are earning a solid six-figure doctor income, and need to take your kids to their baseball game by 5 o’clock, it’s time to find a way to reduce that commute.

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Move the goalpost as your priorities evolve

I’m a big fan of moving the goalpost. I still have commute times on par with the rest of the country, but part of my financial plan includes cutting down on the commute times. It’s all about how much we’re willing to put up with. If you are progressing towards financial freedom, you ought to have less willingness to tolerate long commutes. It’s simply not worth your time to sit in the car. By shortening your commute, you are essentially increasing your hourly wage while working less.

We all should have reducing commute times on our financial plans.

Rookie mistake – letting children thwart your retirement plans

Posted on April 22, 2018January 30, 2021 by SmartMoneyMD

Our future lies in the success of our progeny. They are the ones who will advance our society, healthcare, and keep us safe. Unfortunately our successors aren’t born with the tools to run the world–they still need the support of those with more experience. At age one, I was definitely crying most of the time. At age six, I still cried at pretty much every chance I got. At age 10, I was probably helpful around the house but I was definitely not solving world problems.

Don’t worry, your car seat has an expiration date so it won’t sit in the garage forever!

In fact, I was pretty much useless in my line of work until my late 20’s. Up until then, I probably consumed quite a few financial and mental resources from my parents and society.

Children have even more opportunity today to burn through your doctor-sized income.

Serious money can be spent raising a kid, long before they reach schooling age. Bassinets, pack ‘n’ plays, rocking chairs, diapers, formulas, strollers, “travel systems”, and all of the early life activities.

I was talking with colleague recently and noticed that she had a very intricate travel system for her young twins. For those of you not in the “know”, a travel system for young kids involves a mobility carrier to ease movement between car seats, strollers, and even airline travel. It looked fancy and appeared to take effort to put together. Several weeks later, I had a coworker who complained about the cost of the very same travel system. It turned out to be $800!

That’s right. This is an $800 investment that ought to ease the burden of parenthood, keep your kids safe, and last up until age 2. Afterward, you’ll likely need to upgrade to a better system for older children. If you’d like to have the state-of-the-art jogging stroller for your children, you’ll have to lay down another $1,000 purchase. If you’d like to find a portable stroller that you wouldn’t have to gate-check when flying, be prepared to drop another $200.

We have to be mindful of our own limitations

One of our goals as parents is to instill best practices to our youth. We hope to give them the opportunities that we didn’t have ourselves. This can get us into a lot of trouble. Just because mom and dad can afford the nice childhood luxuries, nannies, au pairs, and early educational toys doesn’t mean that Jr. needs it in order to become a productive member of society.

I blame peer pressure on our shortcomings. It is easy to compare ourselves to our colleagues, friends, and acquaintances. Society expects a certain standard of living based on our profession. We expect a certain standard of living for ourselves based on our professions. When our coworkers have the latest gadgets for their children, it is tempting to follow suit. After all, it’s for our kids right?

In order to reach our financial goals, we create a financial plan based on our in’s and outs. It’s easy to increase our expenditures especially if we rationalize that we’re helping our children succeed. But that is the wrong move. You’ve made it thus far in your career to build a stable financial footing for your family despite the challenges. Your children should be up for the challenge too. It will only make them stronger.

What big ticket expenses for your children could you have foregone?

When can this 55 year old doctor retire?

Posted on March 11, 2018January 30, 2021 by SmartMoneyMD

What are the first thoughts that come to your mind when you hear about a 55 year old doctor who has been practicing medicine for about 15 years but only has approximately $90,000 in her 401k? I’d certainly like to hear more of the story.

Dr. X, who is a Hospitalist is exactly that doctor. She moved to the United States after finishing medical school outside of the country, and had to retrain. She has three kids, two of whom are currently college students attending private schools. Where did all of her earnings go?

As a cost-conscientious immigrant she did learn to pay for everything in cash, including her house which is worth about $700,000. All three of her children own cars that are paid off, as does her husband. As a high-income professional, she also enjoys nice vacations and fine luxuries.

I think that the easiest reaction to hearing all of this is to pass judgment. However, the reality is that not all of us have had the opportunity to learn sound financial habits. Cases like Dr. X are incredibly common. What’s more important is to realize that Dr. X’s situation thins out her financial buffer—she needs to continue working hard at her day job and make prudent financial choices going forward.

Tackle your expenses to gain control of your finances.

Dr. X’s financial situation has similar issues as someone who earns $30,000 a year and has thousands of dollars in credit card debt. The only difference is that she probably is dealing with another zero to her salary. It’s also unlikely that she will have any salary increase given that she is likely at the upper end of her earnings at this point in her career. The biggest variable that Dr. X can control is her expenses.

Children

Dr. X is currently paying for her children’s education but she doesn’t have to. The youngest child is currently in private school while the older kids attend private colleges. There is financial aid for college students, even though Dr. X is a high-income professional. It is unlikely that they would qualify for need-based grants, but current federal student loans can be obtained for a jaw-dropping 6.8% interest-rate! Top tier private college tuition in 2018 is nearly $60,000, with total education packages estimated to be in the $75,000 range. Dr. X does not have the career longevity to put two kids through private college…unless her kids become entrepreneurs at an early age to fund their parents’ retirement.

Room service macarons will add another year to your working career!

If either of the children’s cars are not paid off, then Dr. X should reassess what options she has to reduce operating costs. Can Dr. X sell the cars and pick up a beater for the kids? Or should they rid of the excess gas/electric/money guzzlers unless the children can afford the cars themselves?

Lifestyle habits and other expenses

Dr. X should break out the credit card and bank statements do perform a thorough exam. Expenses should be scrutinized to the level of a twenty-some year old medical student or resident who has a negative net worth to her name. Cable bills, grocery and restaurant bills, and all other recurrent big-ticket items need to be assessed. This includes mega heating bills in the winter or four-figure monthly cooling bills in the summer. Major vacations for the family need to be reconsidered until a set financial plan that can get Dr. X into retirement can be made.

The greater amount that can be moved out of the fixed household expenses, the greater that one can shift towards a retirement savings bucket. Is her husband working? If so, the husband needs to perform a physical examination of his wallet.

Retirement savings

At age 55 with only $90k of 401k to her name, Dr. X doesn’t have much leeway in the tax-advantaged buckets. Assuming a capped catch-up contribution of $24,500 in 401k per year, Dr. X ought to be able to put in close to another $250,000 by age 65.

So starting with $90,000 in the 401k, with monthly investments of $1875 and annual growth conservatively of 4%, Dr. X would have around $403,000 in 10 years. This would only support an annual expenditure of $16,120 with a safe-withdrawal rate of 4%. Tack on roughly $20,000 of social security benefits at age 65, and that adds up to less than $40,000 a year to spend on living expenses. Doable? Absolutely. Most American households aren’t going to have even that, but that’s a far cry from Dr. X’s current expenditures.

The conclusion? I still think that Dr. X can retire, but she will have to make tough decisions to curb her spending, stay healthy throughout her career, and make the most of the situation.

Focus on your savings rate when short on investment time

Posted on February 23, 2018January 30, 2021 by SmartMoneyMD

It’s human nature to want to tweak our investment strategies. Tax-loss harvesting, optimizing your asset allocations, delving into real estate or even multi-level marketing are some of the strategies that we all try to use to give that additional alpha to grow our net worth. The basics of these principles are not rocket science, but implementing them does take time. Even with appropriate strategy, returns are never guaranteed.

Many doctors simply still don’t have enough time or energy to tweak our investments. One of the reasons why I haven’t delved into real estate investments is simply due to the lack of time, motivation, and the interest. Likewise, it’s okay to realize that you can’t win everything. There is no set formula to reaching our financial goals. The great news is that you can still win in the end without micromanaging your investment options.

I like to focus on mini-victories in my daily life. Whether it’s simply getting the laundry basket emptied, keeping the house clean, or even getting through a rough workday, these are all wins. On the investment front, I focus on simplicity when I do not have the time to tweak my investments.

Drinking additional beer will cut into your savings rate

Remember that the majority of our net worth comes from our savings, especially early in our investment careers. We can’t control the bull or bear markets, but the longer we are in the investment market, the more time we have to ride out any dips. This means that we ought to front load our investments to maximize our ability to win.

When you are too busy in your daily life to go for advanced tax and investment strategies, focus on your savings rate. The more you save, the more you can place into the market to grow (and ride out losses). Last year (2017) showed tremendous growth in the stock market, and even with very basic total stock market index fund investments, my pot grew by over 18%! Being able to invest heavily prior to these up markets can offset most losses outside of the worst recessions. This is all due to controlling your savings rate, nothing else!

The next time you find yourself struggling to find time to optimize your investment strategies, just remember on your savings rate.

How important is an emergency fund?

Posted on October 22, 2017January 30, 2021 by SmartMoneyMD

How much one should keep around in an emergency fund really depends on risk tolerance and how quickly one can access a big wad of cash for emergencies. I tend to believe that those with high risk tolerances have probably never experienced a true emergency, or at least one that could seriously stress your wallet. Most of those financial bloggers out there who proclaim that they have $0 in their emergency funds are typically young without kids. Sure, you should put your money to work for you, but sometimes you do get unlucky and stuff hits the fan. The same analogy can be made with putting 100% of your investments in the stock market. Do you start panicking when your invested worth drops by 80%? What happens when junior gets diagnosed with pulmonary atresia, you get locked out of some insurance plans for a pre-existing condition?

Uncommon events are uncommon, but someone will eventually represent the uncommon statistic. Sometimes life will suck for that statistic.

Point in fact: I encountered a major plumbing problem recently that clearly stressed my wallet.

Without boring us with the details, we essentially had no running water in the house. From start to finish, there was probably no access to water in the house for about five days. No faucet water. No toilet water. No shower water. This experience also served as a reminder how dependent we are to modern conveniences like electricity and plumbing. I even had access to water while at work, but I was still miserable! In contrast, much of Puerto Rico still doesn’t have potable water or electricity after an entire month!

You might also like: Replacing the flammable vapor sensor in your hot water heater

This particular plumbing problem was clearly above my skillset. I would have needed over $10,000 of plumbing equipment plus some serious experience to have fixed this myself. I ended up calling upon some plumbers to get some quotes.

Wallet gouging expenses do hurt no matter how you put it.

Ouch. This is where an emergency fund would come in handy. Fortunately my plumber accepted credit cards at no additional charge, so I was able to use my credit line. Imagine, however, needing to come up with a check or that amount in cash. That would definitely put a strain on anyone’s wallet.

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Ultimately, having immediate access to some cash can’t hurt. Because I am currently still in the earning stage of my financial career, I will most likely have at least biweekly access to some cash through my paycheck as a buffer. However, my emergency fund consists of a credit line on my credit cards. That’s probably not the ideal way to access cash, but the credit card companies also grant me with check writing capabilities as well in case I run into situations where credit cards won’t help. Will this protect from all financial disasters? Not even close, especially if zombies take over the world. But I think that it covers most of the situations that I would expect to encounter.

How do you handle your emergency funds?

What percentage of your investments should be in a taxable account?

Posted on October 18, 2017January 30, 2021 by SmartMoneyMD

This is a ratio that I struggle with. Obviously the greater amount that one has in a tax-advantaged investment account, the less tax drag you’re going to pay for. With the current options of investment vehicles, one can potentially squirrel away a relatively hefty amount in a tax-advantaged account. Small business owners know what I’m talking about. So do managing partners in their practices. If you have several high-income ventures, you can shove away a solid six-figures in tax-deferred accounts.

When your earning velocity slows down, the tax-deferred amounts can be slowly withdrawn to fill up our lower tax brackets. For some physicians, this can mean shifting from a 50+% marginal tax (sometimes even effective tax) bracket down to something like a 10-15% effective bracket.

If you are able to do that, then you’re in an envious position. Some of us are just stuck in an employed position where we can only fill up the employee portion of our 401k space. Unfortunately we all know that saving only this amount will never be enough to a safe retirement, especially if you decide to hang up your hat early. I am in this very situation, and I end up putting most of my stock/fund investments in a taxable account.

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Over the years, I try to shove away as much as I can to catch up for the lost years of no income during schooling. I’d anticipate that eventually my tax-advantaged accounts will only amount to about 10% or less of my total investments. This is perhaps a much smaller percentage of what most people will have, but this also creates an interesting arrangement that I will have to consider later in life. There are considerations for putting your investments in a taxable account.

Disadvantages:

Tax drag during investing years. Investment vehicles will need to be tax efficient, as dividends and interest that gets kicked out is taxed. Funds with high loads or high levels of activity will kick out taxable events.
Liability. Unlike investments in your 401k, tax-sheltered accounts, or (shudder) cash-value investments, your debtors can access your investments in a taxable account. You need to protect it appropriately. Umbrella insurance is the key word.
You will likely have less of this to invest. You are investing your post-tax income in this vehicle. In some ways, this isn’t really a huge disadvantage, but it does seem that way because Uncle Sam has already taken away what you can put into this vehicle. He will also continue to take away from it through further taxes on growth.

Advantages:

During withdrawal years, income is treated only as capital gains taxes, which is lower than traditional income. You can really combine this with your tax-deferred account withdrawals to minimize your tax burden during retirement.
No maximum amount that you can invest. The sky is the limit.
No minimum that you have to withdraw either.
Tax loss harvesting. If you end up with a loss in a particular category, you can sell it, and purchase similar funds at the lower rate.

Whenever I do go through the pros and cons of taxable accounts, I do feel a little bit more at ease. It’s not bad that we have many options to grow our wealth. After all, the true secret to building wealth is saving more than you spend.

How much of your investments belong in taxable accounts?