Proof is in the Pudding: Live like a Resident (Series)

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.

Set for Life InsuranceThat’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)

Year 1 2 3 4 5 6 7 8 9 10
50,000 104000 162320 225305 293330 366796.5 446140 531831 624378 724328
50,000 100,000 150,000 200,000 250,000 300,000 350,000 400,000 450,000 500,000
100 96.2 92.4 88.8 85.2 81.8 78.5 75.2 72.1 69

 

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]

Year 11 12 13 14 15 16 17 18 19 20
832274.4 948856.3 1074765 1210746 1357606 1516214 1687511 1872512 2072313 2288098
550,000 600,000 650,000 700,000 750,000 800,000 850,000 900,000 950,000 1,000,000
66.1 63.2 60.5 57.8 55.2 52.8 50.4 48.1 45.8 43.7

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.

Contribution versus compound interest

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 rateA 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!

Take Home

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?

TPP

 

17 thoughts on “Proof is in the Pudding: Live like a Resident (Series)

  1. I’m almost 2 years out of residency and still live like a resident. My husband and I worked aggressively to pay off our student loans last summer. I did pick up a lot of extra shifts last year as we also had our wedding as well. This year, I’m just doing the required shifts. Instead of buying, we are renting a 600 sq studio. We made great efforts to choose the location of our studio so I could give my car to my younger brother. We utilize travel hacking to travel lavishly for a fraction of the price. Our loved ones think we spend a lot of money but they don’t believe us when we tell them that our saving rate is >50% living in Chicago. A lot of our friends still haven’t touched their loans yet.

    • Sounds like you “get it” and made some really wise choices. Those choices are going to pay huge dividends as you reach financial independence decades earlier than your colleagues. Keep up the strong work!

      P.s. What kind of travel hacking do you think makes the biggest difference?

  2. While not a resident, I can decidedly see similar trends among the other PhDs at work. Being paid in Scandinavia, most of them succumb heavily to lifestyle inflation (a PhD pays roughly three times a regular student stipend). The cafes and cafeterias on campus are especially well visited to award yourself for a long day in the lab.

    Why, oh why do people spend upwards of $3 for a regular black coffee in the cafe, when there are coffee machines and coffee/tea all over campus???

    • I think this is more of a human phenomenon, I just see it in my residents. People are consumers and will spend what they make until they realize there is a better way.

      P.s. I agree that the best tasting coffee is free coffee!

  3. Excellent post. When your investments start making more than you save, that’s escape velocity. And that’s when your wealth takes off. But it takes a lot of prep work in the kitchen before then. All residents and early attendings need to read this.

  4. Great post. Savings rate is a big one as it lays the foundation for compound interest, and it’s something that you can control (unlike investment returns). Most docs make enough to be able to max out their tax-advantaged accounts and pay extra toward their student loans.

  5. We bought the big house and doctor stuff. After a few paychecks melted away without touching debt or retirement I freaked out. Thanks to some good books (I’m a fan of William Bernstein) and websites like WCI We made serious changes including a job change. Never looked back. Wish I would have read this post about 7 years ago.

    • Thanks for the comment.

      That’s exactly why I am trying to get the word there. I work with residents and medical students daily and try to advocate for these changes in my daily life as well given that there are two topics we learn nothing about in training that are so important: Wealth and Wellness.

      Hopefully, this post will prevent someone from making the same mistakes you and I did along the way! Glad you’ve righted the ship.

  6. I can’t remember who called the living like a resident years a ‘financial fellowship.’ I like that analogy too. It drives home the point you are making about savings rate. Having a >50% savings rate is essential to hit financial independence quickly.

    The other part of what makes living like a resident so important is that you avoid early career lifestyle creep and can slowly change your consumption. The 10% rule you mentioned can really help you feel like you are being properly rewarded for your hard work but not at the expense of future you.

    • Completely agree.

      I’ve heard of the financial fellowship, too, but am not sure who coined it.

      We have definitely put more than 50% towards building wealth between our debt and investments.

      The 10% rule makes the heart happy so that you don’t mind doing all of that.

      Thanks for commenting, Kpeds!

  7. Your information is right on! I’m in primary care which notoriously doesn’t “pay a lot”. But I worked hard 2 years out of graduation, lived cheap, traveled on CME and piggy backed vacation trips to them to save money, and I’m solidly at year 3 on your savings and investment chart. The freedom is 100% worth it. 3 years out I can now live “like a doctor” and also keep saving with compound interest!

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