I’ve said this before, and I’ll say it again: Wealth = Income – Expenses. In order to build wealth, you either have to increase your income or decrease your expenses. Simple as that.
As a physician, your income is contingent on how many patients you see, your reimbursement schedules, plus any ancillary income you can generate associated with your profession (speaker fees, real estate from surgical centers, or consulting fees). We can control this simply by working smarter (more efficiently), harder (pile on more patients per day), or longer (add in clinic hours). There is obviously an upper limit on your income.
By far the highest expense for most people is housing. The problem with housing is that the costs vary wildly throughout the country. Unfortunately, physician income does not usually track cost of living well. The good news is that physician income also is relatively high so you can grow your wealth quite rapidly if you can control your expenses. This equates to controlling where you live.
I recently found a general surgeon position at a large HMO practice in the San Francisco Bay area. The posting was for an income of $400,000 annually. At first glance, that sounds like serious money. But remember, you only get what doesn’t get taxed and what you don’t spend. I found a similar job opening in Madison, Wisconsin for the same type of specialty with income starting at $300,000. If you look strictly at numbers, it seems like a no-brainer to choose the job in San Francisco. You get paid more AND you get to live in a more desirable part of the country. With an extra $100,000 a year in income, you should be able to make up the difference in cost of living easily right?
According to PayScale.Com, an income of $400,000 in the Bay Area is equivalent to $261,000 in Madison, WI! How is that possible? You not only pay more for housing in San Francisco, but also gas, utilities, transportation, food, and taxes. An extra $100,000 for someone in the top marginal tax bracket living in California will likely give up at least 50% to Uncle Sam. In Madison, I can get a fifteen year mortgage on a $240,000 home for less than $1,500 a month. In San Francisco, I’d pay $3,900 a month for a studio or 1-BR rental! If I wanted a 2,000 square foot house in San Francisco, I’d have to be looking at something at least $2,000,000!
So no, $400,000 in San Francisco is actually not equivalent to $300,000 in Madison. That is the price you pay to live in the mecca of tech—as a doctor.*
* A job that actually pays that well in SF is actually quite unusual. If you take a job like that, be prepared to work hard.