We all have this image of doctors. We believe that that they are all-knowing and well … rich.
But, is that really the case? Let’s check out what this young doctor (a new reader), David, has to say:
I am a young physician (early 30s) making approximately 800k per year. After expenses and taxes, I am left with ~300k to save/invest. However, I have been making ~40k for the majority of my working life and am completely overwhelmed as to how to handle this chunk of change (unfortunately I received no financial education in medical school…). Do you have any advice as to how and where I should allocate this money? I am worried about investing too much money in one source and would like to be fairly diversified.
You see, right here is where doctors go wrong!
Firstly, $120k – $250k net spending money p.a. [AJC: my estimate, depending on how the taxes and other expenses work out] is, indeed, quite a large “chunk of change” …
… especially when jumping from $40k starting salary.
So, the first mistake that most people in this situation make is to immediately increase their standard of living. Now, a conservative person won’t increase their living standard to $120k less 10% (because that’s what the books tell you that you should ‘pay yourself first’), but the chances are that they will raise their living standard quite dramatically.
The $40k quickly becomes $60k as they equip themselves with a new car and some extra furniture and a larger TV or two … then $85k as they move into a bigger apartment (with a view) … then $120k as they step into a more committed relationship and buy the house, school the kids, and so on.
In other words, the treadmill has a way of increasing its speed until you forget that you are supposed to be ‘rich’.
You see, David’s sudden increase in income comes under the heading of ‘found money’; I’ll post on it soon …
It would be helpful to have a break down of the “expenses” – if a substantial part are incurred in earning his income (e.g. insurance, student loans etc) as opposed to personal expenses (e.g. new car), that would make a difference to the commentary – if David is now spending $200K + on living expenses then he is doing himself a disservice and reigning in the lifestyle upgrades would get him closer to finanical independence much quicker.
At the risk of being out of step with the 7m7y theme, I’d suggest he continue to focus most of his energy on maintaining or growing his professional income. Time spent on side ventures and investments should be limited so that it does not interfere with the $800K professional income. If the doctors I am acquainted with are any indication, I would assume he does not have a lot of spare time for other activities.
The reasoning is relatively simple – if David can control his expenses, maintain his income and avoid bad investments he will achieve financial independence relatively quickly – anything from 5-12 years depending on actual living costs and total savings. Sure, a successful business or some very successful investments may get him there sooner, but not without taking on the risk that he well either get there a lot later or not get there at all. He probably does not have the time to do both. If he sticks to a career that is clearly paying extremely well and controls his lifestyle inflation, he will get there quite quickly. IMHO, the near certainty of achieving financial independence in a reasonable time period is a better option than risking the possibility of taking a lot longer to try and get there a year or two sooner.
In terms of investments, given his time constraints, I’d go with a Boglehead approach, possibly supplemented with some geared cash flow positive real estate (especially if he lives in the US and can take advantage of depressed prices and long term fixed borrowing costs).
I’ll now sit back and wait for Adrian to express a contrary view 🙂
Firstly, just from the comment quoted, it doesn’t seem as if this guy is intent on retiring as quickly as possible.
My first advice to him would be to become intent on that. He can always keep working after that, but he wouldn’t have to.
My second piece of advice to him would be to read two books:
Firstly: Repeat this until rich (the free one you can download from this site)
Secondly: Read “The Gone Fishing Portfolio” by Alexander Green.
Thirdly, start saving immediately, as hard as you can. Begin to drive down your living expenses as ruthlessly as you possibly can, and resist, at all cost, the temptations of that treadmill.
Assuming that medicine is something he’s actually interested in, I would then advise him to use Alex Green’s advice in terms of investments in stock.
Use some of AJC’s advice combined with Alex Green’s advice to create a property portfolio.
And make sure that you reinvest some of your money back into your practice, and begin to expand it. Now I don’t know enough about the medical world to give very specific advice in this direction, but I would think it might be possible to expand a single doctor practice into a larger multi-doctor and other staff practice that begins to provide some extra services around health, begins to employ some more doctors and medical staff that provide these services (at a profit of course). Create something unique where the putting together of your services makes the experienced value more than what people experience in health care at the moment, wherever you are.
Grow this thing for a while – and if you enjoy it, keep doing that.
If you build it up well for a few years, then you can probably sell it as a going concern, or if you’ve set up a good structure of partners (or whatever structure works legally in whichever country you are)you could groom someone to take over the reigns and move to a passive partner role.
In economics, it’s assumed that income will either go to consumption or saving. When saving increase, it means consumption decrease and ultimately income will decrease as well.
Harold,
Maybe I am missing something fundamental here. But in my mind, if saving increases, and that saving is well invested, then at some point I can convert that saving to income generating instruments and income will increase, not decrease?
There is no reason for my income to decrease just because I decrease my consumption. On the contrary. I have found that when I started taking saving seriously, I became more committed to increasing my income, in order to accelerate my saving.
Pingback: Poor little rich doctor …- 7million7years