Before my financial awakening two years ago, I made a bunch of financial mistakes ranging from forbearing on my debt – please, don’t do this – to investing in the market while I was accruing 6.8% interest on my student loans. There are a lot of reasons why I made these mistakes. Many of them – that I am going to spend some time disproving today – were caused by lies, myths, and otherwise untrue things that were told to me. Today we will dispel four lies about money that are told to doctors and doctors in training, which prevent them from making the right choices.
Lies About Money #1: It’s Just a Drop in the Ocean
Every medical student, resident, and fellow has heard this phrase before. The idea is that your debt is already going to be so overwhelming that you might as well forget about adding money to it. Finance that sweet ride. Buy the bigger house. Take the more expensive vacation. It’s just a drop in the ocean of debt you have accrued.
The problem is that this kind of thinking leads to some really bad financial practices like buying a brand new car as a resident, getting a bigger house than you can afford as soon as you finish training, or eating out every day as a medical student.
While you are in debt, every dollar you spend will likely cost you $1.50-$2.00 when you finally pay it back. The reason for this is that the money could have gone towards minimizing your student loans or paying them off instead, but it was used on something else. All the while, your loans still accrue at rates likely greater than 6% interest.
So, if you finance a car that costs you $6,000 per year for four years during medical school (total of $24,000), you can expect that car to actually cost you $36,000-$48,000 when you finally are forced to pay back your student loans.
Do yourself a favor and keep your future self in mind. Just because you’ll be earning more money later, doesn’t mean it won’t be exquisitely painful to pay your debt off. Trust me.
Myth #1: Whatever you spend right now while in debt, doesn’t matter. You can pay it off later.
Truth #1: Every dollar you spend now will cost you 150-200% more when you start paying it back. It will definitely matter.
Lies About Money #2: When we Start Making Money, Our Financial Decisions Will Change
This is every person since the beginning of time. As humans, we always have the view that we will do things the “right way” once things get better. I call this being “blinded by the lights.”
The problem is that behavioral finance decisions usually don’t change just because you started earning more money. If you are used to buying things through credit or debt because you cannot afford them now, this will likely continue even when your income increases.
The same goes for saving. If you cannot save money while you are in training – and earning the median income in our country (~$55,000) – you are unlikely to save as much as you should later. You’ve already gotten used to bad habits.
Myth #2: You’ll make smarter financial decisions when you earn more money.
Truth #2: Your behaviors now will likely continue later. Learn to make smart financial decisions now and it’ll be easier to continue those good behaviors when your income improves.
Lies About Money #3: The Attending With the Nice Car/House/Kids-in-private-school is Rich
In church the other day, one of our pastoral fellows preached on money. He was going through a verse in James, which talks about the tight rope the “rich” must walk.
Several times during this sermon he referenced people who earn more than $100,000 as his example of someone who might be considered rich. Unfortunately, most people think about wealth this way.
It must be pointed out that he missed the definition badly. Being a high-income earner has very little to do with how wealthy someone is if they don’t accompany that earning potential with a high savings rate.
We must remember how wealth works. Wealth (or being “rich”) does not mean spending lots of money. It usually means the exact opposite, saving money. Wealth is usually measured by net worth. Net worth = Assets – Debts. So, the more assets you have – and the less debts you have = more wealth.
By virtue of this fact, the more money someone spends on things, the less likely it is that they are wealthy. When someone drives the nice car, lives in the big house, puts the kids in private school, and eats out at the nicest restaurants… this usually means that they are the opposite wealthy.
It simply means that they like to spend money, which is the most common reason physicians stay poor. We have a spending problem. There are very few things that will prevent you from building wealth like buying a big fancy house after you finish training. Pay off your debt. Then, buy the house.
If it helps you out, remember this. The panhandler that just got $5 from the car in front of you while you wait at the traffic light is wealthier than you are if your net worth is negative.
Myth #3: People with really nice things must be wealthy.
Truth #3: Wealth = Assets – Debts. A high savings rate towards assets and paying off debt (not accruing it) is how you become wealthy.
Lies About Money #4: Investing in Residency Will Not Matter
We have touched on this one before.
This section requires a qualifying statement. I do not recommend every resident invest during residency. If you have debt, and are privately refinanced. Then, pay off your debt. Don’t invest. However, for some residents investing makes sense. This is for those people.
The lie goes something like this. “Putting money towards retirement will not matter when you are a resident. When you finish you’ll be able to save so much more. Just enjoy your money right now.”
This is a mathematical questions. It’s either true or its not. Let’s look at the math.
Let’s say you fill up your entire Roth IRA space every year during residency. That’s $5,500 per year. Let’s further say that you are in a five year general surgery residency. This will be a total of $27,500. How much will that be worth when you start using it in retirement?
Well, this requires some other comments. Roth money should always be used last in retirement, if at all, because of the advantages it provides – no required minimum distribution, tax has already been paid, etc. (It also makes for great inheritance money as a stretch Roth IRA).
For this reason, let’s assume it grows during your 25 year career and you don’t touch it until 25 years into retirement. This means the money will have a total of 50 years to grow.
With these assumptions, how much will that $27,500 that you saved in residency be worth? The answer (assuming 8% growth) is $682,000. Still think that investing in residency isn’t worth it?
Myth #4: Saving during residency won’t matter in the end.
Truth #4: The people who told you this lie are really bad at math.
The take home from this post is to trust, but verify. You should not believe everything that you hear. If it sounds too easy, it probably is. Look things up and verify what you see through reputable sources.
What lies have you heard about money that impacted your decision making? How did you realize it wasn’t true? Leave some comments so others don’t make the same mistakes.