Every year, I give a talk to my residents entitled “Investing 101.” They likely expect to sit down and learn the difference between stocks and bonds. Or maybe how to define a putt, call, or mutual fund. Instead, the first fifteen minutes are spent on an entirely different subject. When the rubber meets the road, investing talks aren’t very helpful if there is no money to invest. See, doctors don’t have an investing problem, they have a spending problem and a lifestyle inflation problem. This is the big dilemma: lifestyle inflation.
My Last Resident Paycheck & First Attending Paycheck
One of the “hooks” I use to help my residents understand this problem is to first show them my last resident paycheck, where my monthly take home pay was around $3,500. I then show them my first attending paycheck, which resulted in a monthly take home of about $16,500.
Then, I wait.
The eyes start to open, the “ooh’s & ahh’s” start to come out as the residents wrap their mind around that number, which actually ends up being higher once I meet the social security wage base each year.
Then, finally, someone says, “I can’t even imagine making that much money in a single month. That’s like five or six months of pay for us.“
The Big Dilemma: Lifestyle Inflation
Unfortunately, the residents only get to enjoy this amazement momentarily as I then spend some time crushing their dreams of buying the big house, buying the new car, private school for their kids, and the like.
Why? Because this started as an investment talk. You have to save money first, if you plan to have any money left to invest. Otherwise, the talk is pointless.
First, I show them what it’ll look like if they don’t save intentionally and spend the money how they want when they finish training.
Here is a common example that I use. If they want to have $4 million dollars for retirement by age 60, which allows for about $160,000 in annual spending in retirement based on the 4% rule, then they need to be saving about $4,500 per month (assuming that they graduate around age 32).
After a massive lifestyle inflation, this might not be possible.
The following big picture items swallow up that substantial attending paycheck they just witnessed. Let’s look at how much we would have left if we subtract all of the following from that $16,500 paycheck:
- $4,000 mortgage payment ($750,000 home at 4.5% – 30 year fixed)
- $3,000 student loan payment (paid off in ten years, because they didn’t use a student loan refinance ladder)
- $2,000 to daycare or private school for kids
- $1,200 car payments
- $1,650 to tithing/charity
- $500 for disability/life insurance
Notice that I didn’t mention anything about vacations, traveling, gas, groceries, utilities, cell phones, etc. That’s all in addition to the previous fixed expenses. Despite that, guess what your take home pay is after those large lifestyle decisions?
And, we just said that we needed to be saving about $4,500 per month to retire at age 60 if we started saving at age 32. Yikes. With that kind of lifestyle inflation, we aren’t going to make it.
Even without tithing/charitable giving, the take home would be $5,800. I don’t know too many doctors who can save $4,500 monthly and live on $1,300 per month for gas, groceries, cell phones, dining out, and vacation.
Remember, they were living on $3,500 a month as a resident.
This, my friends, is The Big Dilemma. It is caused by lifestyle inflation.
A Different Way
Lifestyle inflation crushes any chance you have of financial success. You simply cannot do it after you finish training and hope to be able to retire at an age that would be acceptable to you.
Can it be different? Yes, it can.
It simply requires residents/fellows finishing training to make intentional decisions based on what they want. They need to figure out their monthly savings requirements and how quickly they want to pay down their debt FIRST.
Then, they need to build a lifestyle that allows them to reach these goals.
How Much Do I Need to Save?
How does this work?
If you follow the formula listed below, we can figure out how much you should be saving each month based on their individual goals. Ideally, this will be done prior to finishing training.
- Determine the age at which you’d like to be able to retire. Use the Kinder Questions, if you haven’t figured this out yet.
- Then, determine how much you would like to be able to spend in retirement annually. (This assumes, of course, that you are debt free – hopefully through refinancing your student loans). If you are debt free, spending in retirement should only account for travel, food, leisure, utilities, taxes, health care, etc.
- Multiply the annual spending from number 2 by 25 for a typical retirement at age 60-65. Multiply by 30 for an early retirement (to be conservative).
- Then, you get to do some fun excel sheet math using the future value function, which is explained below. Plug in your anticipated monthly savings rate to see how close you are to getting to the number you need to retire when you want.
The Cold Hard Math: Future Functions Formula
- Plug this into excel –> =FV(6%/12, N, [pmt],[pv],1)
- For “N”, plug in the number of months that you are from your anticipated retirement age you determined in number 1 above.
- [PMT] is the amount of monthly savings. For excel to make sense of things, it needs to be negative. So, if you are saving $5,000 per month you need to put in -5,000.
- [PV] is the present value of your savings accounts. Again, plug in a negative number. If you have $50,000 in savings it should be inputted as “-50,000.”
Here is an example. Let’s say that we determine you can save $5,500
Let’s further say that, including your employer’s 401K match and backdoor Roth IRA contribution, you think they will be able to save $5,500 per month.
How much would you have in 28 years (336 months) assuming they have nothing saved and will receive 6% compounding interest? Well, plugging that into excel, it would look like this:
=FV(6%/12, 336, -5500,0,1) = $4,801,343
That’s more than enough! What if you wanted to retire by age 55 (23 years, or 276 months).
=FV(6%/12, 276, -5500,0,1) = $3,273,669
Now, they aren’t quite making it. This number would only allow for $120,000 in annual spending. So, if you wanted to retire by 55 and be able to spend $160,000 in retirement, you would need to be saving more each month.
The point is this. The attending paycheck does seem quite large until we inflate our lifestyle to the point where we cannot save or paydown debt.
Instead of being a typical American and letting lifestyle inflation determine our savings rate while we hope that we have enough left to save for retirement after that point – We should do just the opposite. First, use a backwards budget to determine the savings rate required to retire by the age you want.
Then, build a lifestyle with what is left. Pay your future self first, and your current self last.
Did you do the math first before making lifestyle decisions? Or did you just hope that there would be enough by the time you wanted to retire? Leave a comment below.
Geeking out an Excel, I like it! I can’t imagine that kind of a one-time jump in take-home pay, the temptation must indeed be very very hard to resist. Especially when you know it’s coming.
Yeah, it’s a behavioral finance problem for the ages. Buts is a problem we can solve, if we are taught
Your residents are really lucky to have you. Wonderful that their training program provides lectures on this. I finished 7 years total of post graduate training and not one single hour of a finance lecture was given.
When these residents realize how progressive the tax code is, that big paycheck quickly erodes as Uncle Sam takes a great bite out of it, as well as increased amount given to Social Security, etc.
Lot of things will pop up that quickly drain that money.
Thanks for the encouragement, Xrayvsn. Just trying to do my small part. It seems to be appreciated so far!
Actually, the expenses in the model scenario are far from unrealistic. The easiest thing to do is put off buying the house at $675k. Perhaps you can show some models where there is a $2000:rent payment for five years instead.
Owning a home is a huge money sink, but also requires time and mental energy. It consumes all three at an alarming rate.
I agree. In my lecture I go back and show them what “reasonable” looks like and how much money they would have to put towards debt and retirement.
For the first 18 months out from training we lived in a $120,000 house that cost us $650 a month. It’s one of the biggest reasons we’ve had so much success early on.
I’ll probably do something similar in an upcoming post.
Brilliant romp through the math that most of us never bother to explore.
It’s amazing ( if uniquely human) how the most consequential decisions we make, like our burn rate for money, tend to be the least considered.
Ask a friend to recommend a lip balm and I’ll get a well-researched thesis. Ask the same friend to engage in discussing financial planning for the future, the same thoughtful person prefers to hand wave.
I’ll echo Xrayvsn: your residents are ridiculously fortunate to have you.
That’s for the great post,
As an aside, I realized I’m writing this morning in my limited edition Physician Philosopher t shirt from Fin Con.
Might I be your first blog groupie?
Thanks for the encouragement, Crispy Doc.
And, yes, I do think you’d be my first blog groupie. You poor, lonely soul!
I’m giving a talk on financial independence in a few weeks to our residents and am going to incorporate this into it. The framing is excellent.
I like how you broke down the “live like a resident” idea into actual numbers.
Peds residents don’t have as much of an income jumpas some others but it is still a life altering increase in income.
What we do with it early on can change everything.
This is brilliant. I like how you show dramatically show your residents the big jump in salary then break down the number so effectively.
In general, it’s so hard to play the long game with the short term in mind. We’ve undergone schooling and training for 12+ years and it’s hard to delay the instant gratification of a huge pay increase.
But when you present the numbers like you do, it’s easier to keep focus in the long game and delay that first check gratification.
“Pay your future self first, and your current self last.” I love it!
Thanks, man. Can’t take all the credit here. I was discussing it with a buddy and he said, “you really need to shock them early to make them care when you talk about money.” This is what we came up with, and it worked.
It’s amazing what transparency can accomplish.
The concept of paying your future self first and your present self last is so critical to maximizing the Time Value of Money in our favors as opposed to stacking the compounding of the seemingly “small” present self short term decisions of The Time Deficit of Money against us. Excellent Post. I too would love permission to use your approach in money talks I am having with captive audiences. Any chance of making “The Talk” and follow ups publicly available so that we can help you scale your work?
Happy to let you use it. The more this information gets out in a meaningful way, the better it’ll be for everyone.
I remember having a tenant who was making about $15,000 a year and just getting by. He was about to inherit $20,000 from his grandmother, more than a year’s pay. He had the smarts to ask me what I thought he should do with the money. I gave him a list of 7 things to divide that money into for good use. On August 1st he got the money. He did none of the things I suggested. He blew all the money and did a few things that increased his monthly expenses. By the end of the month, he had none of the money, couldn’t pay his rent and got evicted with a baby on the way.
My big dilemma is getting people to do the things I suggest that will make their life better. When that money gets into your hands, it is very hard to not go spend it.
That was why I wrote the book, The Doctors Guide to Starting Your Practice (Career) Right. I wish every resident would read it before they get that first big boy paycheck and start making mistakes.
TPP, your teaching is spot on. Keep it up.
Dr. Cory S. Fawcett
Prescription for Financial Success
Thats an incredible story, Cory. It doesn’t surprise me, however. The human condition is an interesting thing.
And I agree about your book. That’s why I recommend it at the end of all my talks along with the white coat investor book, the investor’s manifesto, and how to think about money.
This dilemma has also led me to write a book of my own to accompany those that I listed above. Enough cannot be said on this important topic.
Way to kill young Docs dreams haha. I bet looking at that huge jump, many already had their boats, and range rovers picked out lol.
You’re doing an awesome service to these students, or should I say “kids” …. the ones that listen will come out way ahead
Haha definitely not kids. They are responsible for lives every day 🙂
And it definitely is a really hard urge to fight for sure.
My husband is retiring from anesthesia in two years, after what will be a 32 year career. Back in 1988 , in his final year of training (he did a fellowship) he earned $35,000. I stayed home with our toddler son, and did not earn anything. I remember thinking back then, that on June 30th we would go to sleep on a $35,000 income, and wake up on July 1st with an income over 6 times what he had been earning. Heady stuff. We did rent for 6 months to save up a down payment, and bought our first home a few months before our 2nd child arrived. We did inflate our lives somewhat: bought a new car, furniture, etc. What saved us was that we never moved from our first home. As my husband’s salary increased, and at one point doubled at a new hospital, we remained in our home. He also did not have any medical school loans, thanks to his parents generosity.
Thirty years later, we are still here (the house has been remodeled somewhat) but we have saved a lot by not moving to a larger home (and the real estate taxes and maintenance that go along with a larger place). Almost all of our physician friends moved up to nicer homes, and I have had to try not to envy them. My husband could live in a box. The payoff has been our ability to pay the tuition for three children and now medical school for the youngest (out of current income, not savings!) Our net worth is not too shabby either. I have discussed lifestyle inflation with my son in medical school, and I think he gets it. Will be forwarding this blog post to him. Thanks!
The house is definitely the biggest ball and chain of them all. My wife and I committed to not buying a house until a plan was in place to have them all paid off in the first two years after training.
We just bit that bullet and our first house payment will be due 18 months after I finished fellowship. That said, we will have paid off 180k of our 200k in loans by then with plans to easily pay off the remaining 20k in the two year time line we set.
Life is about balance… But you have to earn it when you finish. That balance doesn’t happen naturally.
Whoa. I notice that when lots of folks start making some serious dough, that the first thing they do is get a big mortgage. Why not invest big dough, instead of spending it. But, that is what this blog is all about after all. Kudos. ?
Preaching to the choir. Lived on 20% of our income the first 18 months out so that we could crush debt and invest money wisely.
Truth in advertising, we did just buy a house but it was equal to our annual salary the last 12 months, which is more than reasonable and we will have rid ourselves of our student loans by next march (200k in less than two years paid off).
Great article. I enjoyed it especially the part about lifestyle inflation. I am not in the medical field, but significant lifestyle inflation can happen to anyone. Right after I finished undergrad back in May I landed a job with a $71,000 salary in a low cost city. I’m on track to pay off my $35,000 student loans in less than a year (10 months total, but only have about 5 months left). I don’t have a car loan, and will hopefully never have one ever. And, I still cook my lunches and dinners for the week on the weekends. I do eat out once a week. In other words, I still live like a student and it’s great!
That’s huge! Great job on paying off that much debt so quickly. That’s essentially half of your income.
Keep up the frugal lifestyle and you’ll be getting to your goals quite quickly. Just don’t forget to live a little along the way. Frugality can bite hard when we frugal too much 🙂
I clearly chose the wrong field!… but I don’t like blood. I only doubled my paycheck when I left grad school (well, I also chose the wrong initial gov’t salary job although I fixed that mistake fairly quickly). I did also start out with a final monthly grad school check more like $2500 too if memory serves. But since I went from a LCOL to a HCOL area I was too busy reeling at the price of milk to go designer for clothes. And I did read somewhere that your dwelling should be only 28% of your pay which I really tried to stick to… to the extent that though I was living very close to my job I was in a place infested with roaches and there was an (accidental!) stabbing upstairs. I bought a new (to me) car with cash… which I still drive today, actually, ~15 years later. Oh, and I didn’t have student loans! That helped a ton. And then, since I still consider myself a renter at heart I was REALLY reluctant to go deep into debt when DH was yearning for a house near the bottom of the market so we bought a “starter” condo smaller than ideal but pretty close in geographically. It was well within our means when we bought and our salaries have increased a LOT since then. I didn’t really get into investing or even maxing out my 401k until ~5 years after school but I wasn’t going crazy with the major lifestyle creep elements either which did pay off. We just paid off the condo (!) and what with the market and eventually getting into maxing out the 401k and finding out about backdoor roths a few years ago I have around $500K in retirement accounts. I do have a ways to go since I started investing late and made some un-optimal decisions in the 401k but the lack of lifestyle inflation has been very helpful.