Why most doctors aren't rich!

Many people say to me: “I can’t become rich like you because I don’t [insert excuse of choice: have a business; have a profession; earn a high income; come from a rich family; have much time left on this earth; etc.]”.

Now, they may be right … but, if they don’t even try they absolutely will be right ๐Ÿ˜‰

Let’s tackle just one of these ‘objections’ : that you need to be a professional (doctor, dentist, lawyer, accountant, pilot; etc.) to become rich.

Here’s some bad news for you, if you’ve been spending the last 8 years working on your Masters so that you can get a job in a top national firm:

Being a professional is an impediment to becoming rich!

Three major reasons – besides the lousy rates that the health insurers pay doctors ๐Ÿ˜‰ :

1. You have (or soon will have) a steadily increasing high (possibly very-to-super high) income, so your spending habit has this way of growing at least as fast.

The Millionaire Next Door gives a supposedly true story of two doctors on roughly $700k each a year: one was rich (as you would expect!) and the other was basically broke … it’s surprisingly easy to spend $750,000 a year, when you earn $700,000!

2. You have a built-in expectation of a certain minimum standard of living, which typically starts with the amount that you earned at your first job and continues to rise along with your pay-rises.

In other words you have a mental ‘bar’ that you won’t go below … that can have the inverse effect of limiting your upside. For example, it’s unlikely that a professional will give up his lucrative career to start a business (unless the ‘business’ is opening his own practice, in which case he still has a ‘job’) because his earning power will no doubt go down to an unacceptable level before it goes back up.

After 10 years, I was earning a $60k package at the IT company that I was working for, but I could only afford to pay myself $30k a year when I left in 1990 for IDB – In Dad’s Business ๐Ÿ™‚ That poor excuse for a ‘professional’s salary’ did not increase past $50k a year for at least the next 10 years.

3. And Scott (who is a professional himself) seems to understand the third reason pretty well:

After tonight’s live feed, I really started thinking, worrying actually, about how in the world i’m going to reach my NUMBER. 10 million, in 8 years in my current profession. The guy I worked for (that i’ve recently semi-separated from) has spent his entire career, 20 years, opening multiple clinics with other doctors and eventually selling them to those Dr.’s. He has made a wonderful living for himself, been very frugal with his lifestyle and is definitely a multimillionaire, but I suspect not quite where my number is. My concern is that my Number and the time that I need it aren’t congruent with my current profession and would be near impossible to achieve just merely focusing on opening multiple clinics.

I’m wondering if focusing every penny that I make in my profession toward the purchase of more and more commercial real-estate is the only way I have a shot at getting to my number in time?? I know you were able to address this somewhat in the live feed today, but i’m not sure that just owning the real-estate that my clinics operate in will be enough to make my goals happen so i’m thinking that I may need to focus on other, more “big-time” real-estate purchases, the kind of purchases where “Subway”, “Blockbuster” and “Kroger” want to pay you for….Any suggestions on this, or what you would do if you could do it all again and were in my shoes?

The problem is that professionals who then do go into business (i.e. open their own practice, or start / buy into a multiple partner practice) find that those businesses aren’t worth that much – they often sell as a multiple of annual revenue, usually in the range of 0.75 – 1.5 of (say) the average of the last three years’ fees.

Since professional firms don’t tend to grow that large, and when they do it’s usually by bringing on more and more ‘partners’ across whom any profits – and proceeds of any sales – must be spread, the ‘big bucks’ that Scott is looking for just ain’t there.

So, the smart professionals – like the ‘rich’ one in the Millionaire Next Door example above – divert as much of their income-stream into real-estate and other investments as possible.

And, that can provide Scott and other professionals like him with a great nest-egg for their eventual retirement: they can buy the ground under their current practice and/or they can use their high incomes to support negative cash flows on multiple investment properties and/or build up multiple deposits.

The depreciation and other tax-benefits of investment real-estate also work particularly well for highly-paid professionals who otherwise have no legal avenues to ‘hide’ their income from Uncle Sam so would otherwise pay the highest rates of tax.

But, it’s a strategy that is unlikely to produce ‘super riches, super soon’ … which is what Scott is looking for.

The problem lies in simple math:

– Let’s assume that Scott’s total Net Worth is $100k today and he wants to get to $10,000,000 in 10 years; that means that Scott is looking for a 67% compound growth rate.

– According to Michael Masterson in his book Seven Years to Seven Figures real-estate (actually, a mixture or real-estate and stocks) is only good for a compound return of 25% – 35%. It wouldn’t matter if Scott was investing in the real-estate under his clinic/s or in Walgreen’s stores (in fact, his own clinics would produce a higher ROI than Walgreens real-estate due to competition) … he wouldn’t be able to push the returns much higher.

– If Scott put his returns on steroids by investing in a mixture of real-estate and small-businesses (as his ex-boss was doing by opening multiple clinics then on-selling them), Michael Masterson says that he may be able to push his investment returns higher: say into the 40% – 45% – 50% range. This could take him to the $3 million or $4 million that he suspects that his old boss has, but not the $10 million that he wants.

So, Scott, you – as do most other professionals – have a real problem … a problem that can only be overcome by opening your own ‘real’ business … the type of business that others will want to buy for many multiples of earnings because it isn’t tied to the personal exertions of you or the principle/s.

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23 thoughts on “Why most doctors aren't rich!

  1. Hi Adrian,

    I guess you are speaking from your own experience whereby the majority of “7 millions” that achieved in the “7 years” comes from the sales proceed of your IT companies. Undoubtedly, most multi-millionaires make their big bucks either by listing their companies or selling off to bigger companies.

    Anyway, great post, I really can wait to read more about your posting on this aspect.

  2. Terrific post Adrian. You have really summed it up good and you have also hit the nail in the head on the reality of the numbers that I am working with. Actually over the weekend, I did some soul searching on my life’s purpose and the requirements that I NEED and not just what I WANT, (as my life’s purpose reads at the moment) and i’ve come up with a new number that supports THAT life’s purpose and it is not 10 million. I am actually coming up with between 4 million and 5 million to fulfill THAT purpose and THOSE needs and the methods I came up with to get there where pretty spot-on to what you just posted here.

    The only way I can see taking that 4-5 million dollar NUMBER on up to 10 million in the next 10 years is like you said, to come up with a business idea (not a practice idea) that I can sell later. Unless I want to work for the next 30 years, which through the power of compound interest might get me to 10 million, but inflation would have flattened that out good by then!

    But first, this would require possibly a REWORKING of my PURPOSE…

  3. @ Bill – Actually NO. I wouldn’t be writing a blog about how YOU can make $7 Mill. in 7 Years, if I didn’t do it the old fashioned way – by living well below my means and investing:


    @ Scott – If you’ve got a good handle on your Purpose, the Number will follow. If the Number is smaller/longer that’s great news for you, but it is what it is …

    … as our resident professional, I am glad that this post struck a chord with you. It should also let everybody else know that being a professional isn’t all beer and skittles ๐Ÿ™‚

  4. Having been around many different doctors for a few years now, I have observed something interesting financially that seems to run common to most if not all doctors and lawyers as well. It seems that what you have described in this post (as well as other posts concerning doctors, lawyers, etc..). describes how most professionals like this come out of school and go a little crazy at first financially and increase their lifestyle VERY quickly, which creates the rat race and the lack of wealth-building.

    This happens because they first go from rags to riches (sort of speak), in that they have been living on ramen noodles and rice and beans(as Dave Ramsey puts it) for several years while going through a loooong college education that makes most people quit on their hands and knees in tears. But they push-through, working nights and weekends while in classes all day, pushing through clinical internship requirements, clinical rounds, taking expensive boards(when you have nothing to pay for them except credit cards and other debt vehicles)and all of this while their other friends are having frat parties and beer bongs and enjoying their 20’s.
    Then one day the dust clears and they look around and they are in their 30’s all of a sudden and they are actually getting PAID for the first time in their lives. And the pay raise is substantial and the average professional has an innate feeling that they deserve an increase in lifestyle. This is pretty much the story.

    The next thing that happens is the doctor wakes up 10 years later in distress with no savings at all and still lots of debt and begins to do something about it with a better financial strategy, and spends the next 15 years building a next egg of 2-4 million, lol. Being a professional surely isn’t all beer and skittles, but could have the potential to be if a different approach is taken, EARLIER ๐Ÿ™‚

  5. @ Scott – in my circles, it’s the houses (middle-class to upper-middle-class) and private schools that get ’em in and never let them out of the rate race.

  6. @AJC, how did come up with 67% annualized rate of return?

    According to my calculations, assuming you can get a 35% annualized return from investing in real estate, if you invest $100,000 today and add $150,000 to your investment every year for 10 years, you’ll have just over $10,000,000 in 10 years.

    There are a lot of “ifs” in there, but it shows that your original goal is a little more achievable than what AJC laid out above.

  7. I’m with Jeff, I’ve been trying to figure out why the numbers seem off. But it’s because they don’t account for future earnings that can be added in. You’ll need 67% return only if you never save another dime.

  8. I’ve been reading your blog for a while now, lots of good advice here. Now, I would definitely recommend starting your own business to pretty much anyone, but I’m not sure I’d recommend to somebody 10 years away from retirement (and by that I mean retirement in the traditional sense, i.e. late sixties) to drop out of their high paying job and hope to accumulate some insane figure like $10mln. in 10 years. Sure it can be done, and the best of luck to Scott, but I’d suggest you have some contingency plan, like another 10-20 years to work up a nest egg you can survive on if the shit hits the fan somewhere along the way. Let’s not forget that approximately 1 in 10 businesses fail. You might have to give the whole business thing a few shots before it “sticks” ๐Ÿ™‚

  9. @ Jeff – You may or (most likely) may not make $10 Mill. but it’s certainly a good strategy regardless.

    As to the 10m10y? Get your medical degree and we’ll talk in 10 years … AFTER you pay off c/card debt; student loan debt; buy a house to live in; buy a car or two; have a couple’a kids; etc.; etc. You see, life tends to get in the way of saving that much p.a.

    Scott’s the expert … what does he think, knowing professional salaries and living costs?

    @ Ryan – I was talking ‘practical numbers’ based upon the realities of a doctor’s/professional’s life … if they can accumulate more than a coupl’a mill. or so, they are doing pretty well. A lot spend it all (and more) just like the rest of us ๐Ÿ™‚

    @ Sceptic – Nice moniker; I can see I’ll have to be extra careful with you ๐Ÿ˜‰ You know, I tend to agree with you, but try telling that to Ray Kroc, Colonel Sanders and … well … my own father, who all started what became successful businesses in the late 50’s, 60’s or 70’s … not everybody HAS safe/secure (the Col. and my Dad) or WANTS safe/secure (Ray Kroc).

    It’s ours not to reason why, but to help those that DO make the jump (after suitable “AT YOUR AGE???!!! ARE YOU CRAZY, OLD MAN???!!!” disclaimers that help us sleep better at night) to get absolutely, stinking rich ๐Ÿ™‚

  10. @AJC – I think you missed the point of my previous comment. I was trying to point out that, when analyzing Scott’s situation, you probably made some errors in your assumptions (about Scott) that led you to conclude that Scott needed to get 67% RoR in order to reach his goals. It looks like the required RoR can be much smaller depending on how much he is willing to sacrifice (read: save and invest), thus allowing him to utilize other investment options and still have the possibility reaching his goals.

  11. @ Jeff – I didn’t mention adding $150k a year AFTER TAX into the mix (I think that was you?) … but doesn’t it sound like an awful lot to you?

    Of course, anything that you can add each year will lower the compound growth rate required, especially if you can maintain highest and best use of each subsequent chunk of cash (not as easy as it sounds).

  12. Nice post.

    Building up a nice retirement fund from through investing a high professional income into real estate can be done although it does take both aggression and the right market conditions. Even, to produce the sorts of returns mentioned in the post and comments is likely to be a challenge.

    I would say that starting a business is not generally compatible with the working hours which most professionals are required to put into their careers. Speaking from personal experience, it’s pretty hard to find the time or the energy to run a business at the end of a 12-14 hour day (even assuming that family commitments will allow it). Also, many professions are difficult spaces in which to consider setting up yoru own business in a manner which will match the income or give you an asset that can be sold for multiples of income at the end of the day.

    Real estate is much easier and unless you want to give up the professional income, accepting the lower rates of return involved is more realistic. It worked for us (at least in part due to starting the process close to the low point of a down cycle in property prices and Hong Kong’s low tax rates).


  13. @ Trainee – That’s why most doctor’s aren’t rich! I think that the ‘compromise’ for most professionals would be to look to turn their ‘practice’ into a business (e.g. dermatologist might focus on skin clinics; thoracic physician might open up a chain of sleep centers or sell/build new sleep devices/accessories; a consultant might open a consulting practice) … the trade-off being what some would consider to be be professional snobbery (“oh, you SELL, not PRACTICE … hmmmph!”).

    The high-income-channeled-into-RE strategy is a good second level choice (which is why you really need to think your Life’s Purpose in the absence of money, then turn that into real NEEDS – not wants – then convert those NEEDS into cash requirement, then convert that cash into a strategy … THAT will tell you which path to take) only limited by your time/expertise and how much you can actually commit to socking away each year.

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  15. @AJC –

    “I didnโ€™t mention adding $150k a year AFTER TAX into the mix (I think that was you?) โ€ฆ but doesnโ€™t it sound like an awful lot to you?”

    Of course you didn’t…that was my point. Your analysis failed to consider Scott’s ability to incrementally contribute money from his income over the 10 year period. I just thought it was odd that you left it out, since the mantra of this blog (at least in the beginning–money 101 and early 201 stages) is to save as much of your income and invest it. Why wouldn’t Scott be able to follow this advice? …and more importantly, how would incremental contributions affect Scott’s ability to reach his goals?

    Also, I bet the doctor making $700k per year in your example isn’t having a hard time investing $150k/year after tax. Why couldn’t a professional making $350k+/per invest $150k/year after tax (assuming they were following your money 101 steps)?

    Also, I can’t figure out how you got 67%…I’ve run the numbers and come up with ~58.5%. Can you please explain how you came to that number?

  16. @ Jeff – The point wasn’t mathematical (although, if you plug the start/end numbers and number of periods into a compound growth rate calculator you should get my number – or yours – depending upon who did/didn’t make a calculation error) it was ‘real life’.

    Which means that Scott, in particular, recounted to me the story of his boss who owned a few practices (and the property that they ran from) eventually selling them to the doctors working there, yet he didn’t achieve the stratospheric financial heights that one would intuitively expect.

    Thanks for your comments; you have inspired me to do a f/u post …

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  22. You’re absolutely right but I think a professional can achieve what you have. I am/was a professional but I picked this up real fast. I remember after 8 years of a medical education and 2 years of residency i had student loans and was forced to buy a private practice in order to increase my earnings. After my first year, I learned to live well below my means. Although I had a 401k and investments, I still had debt. Luckily I was able to realize that my wife was not working. I started opening up low rate of investment, small overhead businesses through her (low – mod end nail salons and massage spas, selling items on internet, etc.). These generate so much cash it is ridiculous, cash is better than credit. So I used the money I made as a physician as capital and reinvested all my funds into real estate and back into my small businesses. Slowly I sold shares of my own medical practice and invested more into the smaller businesses with my wife. I made more doing the other stuff than I did as a doctor. Now I no longer practice medicine and have devoted my time to running my businesses. I’ve been doing this for over 10 years and have accumulated wealth beyond what a physician working for 10 years would make. 8 figure amount. So I know your methods work.

  23. “I used the money I made as a physician as capital and reinvested all my funds into real estate and back into my small businesses.”

    @ Dr X – Thanks for sharing … this is indeed the formula for wealth, especially for high income professionals!

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