Chances are that if you are reading this blog, you have heard it said time and time again that when you graduate you should “live like a resident.” The truth is that this is really solid advice. Dr. Jim Dahle of White Coat Investor has said on more than one occasion that he can predict your financial future with “surprising accuracy” if you tell him what you did in the first couple years after you finished residency.
That’s all well and good, but where’s the proof that you should live like a resident after residency? Well, the proof is in the pudding. Let’s look at the ingredients to see if the pudding tastes as good as it sounds.
Pudding Ingredient Number 1: Savings Rate
The first ingredient in the Live Like a Resident pudding is a giant dash of savings rate. Your savings rate is the main determinant of your initial success in investing. Later on your money will start to work for you once you’ve saved a substantial amount. Why is this initial savings rate so important right after you finish? Glad you asked.
Let’s do a 2 Million Dollar thought experiment:
Your goal in this thought experiment is to get to $2 Million Dollars. Here are the assumptions. You save 50K annually each year and earn 8% interest growth (we could assume less, it’s just the number I chose). Given these assumptions, it would take you 19 years to get to that goal (you’d actually be sitting at $2,072,313 at the end of year 19).
To understand the following numbers, here is the key to the following tables:
|Row 1||Timeline in Years|
|Row 2||Total Savings, including 8% interest growth assumption|
|Row 3||Your running total of savings contributions (50K each year)|
|Row 4||% of your total account coming from your contribution|
The First Decade
Here is what is what the first ten years would look like (please scroll to right to see extra years)
Even after ten years of savings, your annual savings rate (that $50,000 you save each year) accounts for ~70% of the entire total of your accumulated savings. Why should you care? Let’s take a look.
- This means that the major determinant of your retirement nest egg in your early years is your savings rate (it accounts for 70% of your savings at 10 years).
- With these assumptions, you have not even gotten half way to your goal of $2,000,000 in TEN years of saving. In fact, you stand at less than $800,000.
- Remember, though, I have to add another 1.2 million dollars in 9 years and I only saved $800,000 in TEN? The next decade is where the magic happens.
The Second Decade
[Scroll right to see all of the information]
Here is the take home from this graph:
- The further along you get, the less your savings rate has to do with your total accumulation.
- The rich get richer. Once you’ve saved “enough” your compound interest starts working overtime for you.
- Year 17 is the break even point where the total amount saved coming from your contributions starts to dive below 50% of the total value and compound interest starts taking over as the predominant factor determining your total savings.
- After this point, how much you are saving has a much smaller impact each year when compared to the impact of compounding interest.
Saving Early Matters
For those that prefer visual representations, this may explain it better. The blue bars are the % of your total savings that comes from the money you have saved (i.e. your contributions). The orange bars are the % of your total savings that comes from compound interest.
Time in years is on the X-axis, percentage of your total savings is on the y-axis. Note that the first year you start investing 100% of the bar is blue, because all of your savings came from your contribution.
You will notice that in year 17 these two points (the blue bar and the orange bar) are even at 50%. From that time point forward, compound interest takes over.
In fact, 30 years after this savings plan ($50,000 per year for 30 years) was started, the total savings would be $5,641,161. Of this total, 73.5% would be due to compound interest (or $4,164,161) and only 26.5% would be from your contributions (a total contribution of $1,500,000, or 30 years at $50,000).
You read that right. You contributed 1.5 million dollars over 30 years and made over 5.6 million dollars. THAT is the power of compounding interest.
However, what accomplishes all of this early in your career is your high savings rate. A high savings rate can only be accomplished early in your career by living like a resident when you finish (or having no debt when you finish).
Pudding Ingredient Number 2: Grindin’ Debt
Of course, your savings rate is only part of the pudding. Your savings rate could be even higher than $50,000 per year if you didn’t have those pesky student loans. This is why it is so important to make a plan to deal with your student loan debt early! The sooner it is gone, the sooner you can take the next steps.
This is important because the % of your money put towards debt and your savings rate help determine your Wealth Accumulation Rate (WAR). The higher your WAR, the faster you’ll be obtaining your financial independence. After all, once that debt is paid off you can put that money towards others important things, such as:
- A higher savings rate. Achieve those goals even faster. If you had started out investing $75,000 per year, you would have reached the 2 million dollar mark by year 15 instead of year 19. That would have saved you four years.
- You can make a big purchase, such as a bigger home, with the increased monthly cash flow. That’s what we plan to do two years after training (50% of my previous monthly student loan debt payment towards mortgage; 50% into a taxable account).
- Invest more in your kid’s future via a 529 or Roth IRA if you pay them for work.
- Use some of that money (via The 10% Rule) to enjoy a little more of life. Maybe take that vacation you’ve been waiting to take.
You can do whatever you want with the additional money once your student loans are paid off. However, this requires a plan. And it also requires discipline to live like a resident so that you can take an aggressive route in paying them off.
Ingredient Number 3: A Pound of Earnings
One of the big advantages that you have coming from residency is that you are “used to” working like a resident. If you can keep that work pace up for even an extra 12 to 24 months following residency, you’ll likely make a lot more money.
This additional work could be through locums tenens work, picking up extra shifts, or working a side hustle or three. For example, my side hustles include the following. An invention I’ve been working on, medical malpractice expert witness work, and this website. A lot of my extra hours go towards these endeavors (when my kids are sleeping).
However, I am used to working hard. I just finished training. Keeping this going is going to only help us achieve our financial goals sooner.
The more of Ingredient Number 3 (work ethic) you have the more you can add of Ingredient 1 (Savings Rate) and Ingredient 2 (Grindin’ Debt) to the recipe.
Since this post hasn’t had enough math yet…let’s add some more here. Let’s say you earn an extra $1500 per month from your extra shifts or side hustles. This would leave you with a couple of choices:
One choice is to pay off more debt. Say you came out of medical school with $200,000 in debt. You were smart and refinanced your loans to 3.5%. At $4,000 per month, this will take you 4.6 years to pay off. If, instead, you worked a little harder and made some extra cold hard cash you might be able to pay $5,500 per month. This would pay off that same amount of debt in 3.3 years. It would save you about $4,000 in interest as well.
Alternatively, if you invested that extra $1500 per month for three years after residency (total of $54,000 over that time) this will turn into $404,643 after 30 years at 8% compounding interest.
Either way (paying down debt faster or increasing your savings rate) you are building your wealth much more quickly. This is why it is so important to continue to work hard after residency. You can accomplish your goals faster.
After all, the one thing you can never get back is your time and your young age!
Hopefully some of my arguments have made you consider the merit of living like a resident once training is finished. What you do in those first few years after you finish is fundamental to your financial success.
Leave a comment. What did you do right after you finished? Did you buy the big house and the nice cars? Did you put the extra money towards grindin’ debt or investing? If you had a time machine, what would you do?