Financial Planning for Doctors

I was on a podcast recently where I completely blanked on my own lesson on how to get rich! The Doc interviewing me asked about the “big 5” from my book, and my mind produced nothing of value. I stumbled. I stammered. And I fell flat on my face (verbally). After all, he was referencing something about how to curb spending that came directly from my own book.

So, today, I want to outline one of the keys to obtaining wealth and how to apply that to the five most expensive areas most people choose to spend their money.

How to Get Rich: Limiting Expenses

Most people reading this site have heard the importance of “living like a resident” after residency. The idea here is to limit the increase in spending that typically occurs after we finish training. That’s how people get rich.

This is typically done by putting up some guardrails on our spending. For example, my family used The 10% Rule to provide the guardrails. And I recommend the same rule to others as well.

The 10% rule works this way. First, look at the increase in your post-tax income following training. Next, take 10% and spend it on whatever your heart desires. There are no rules. Just spend it on something you think you’ll enjoy. Finally, take the other 90% and put it directly towards building wealth by destroying debt or investing it via the Pareto Principle.

While that rule works, it is limited in terms of practical application. For example, where specifically should we guard ourselves so that we don’t spend too much money? Or what things might we consider using the 10% raise on each month?

Thus, I bring you the Big 5 expenses that can wreck, ruin, and devour your financial future – if you let them.

1. Houses

Buying the “big doctor house” right after training is the number 1 cause of a sunk financial plan early on in an attending physician’s career. It is (usually) one of the worst places to send your first attending physician paycheck. And, it is one of the best ways to guarantee you won’t get rich early.

Can it work out? Sure it can. High-income earners can makes loads of financial mistakes and still find financial independence eventually. But it’s also not the right thing to do the vast majority of the time.

There are really two options in my mind when it comes to this.

First, if you are moving to a new job, you should rent for the first 6 to 12 months. Make sure you like the job and have a stable life situation before you purchase a home. Otherwise, you might have to come up with 10% of the house cost in order to sell it 12 to 24 months later when you become one of the physician statistics who end up changing jobs in the first two to five years (>50% of physicians).

The second situation involves people who decided to stay in the town where they trained or move to a town that is familiar to them. In this situation, I still think it is prudent to either stay in the place where you are or to consider upgrading marginally via the 10% rule (if this is really where you want to spend your money).

Either way, you should probably sit down, go through the Kinder questions to see what is really important to you, and then make an intentional decision.

2. Cars

Long-time readers will know that I love driving my V-8, naturally aspirated, rear wheel drive, four-door sedan with a 6 speed manual transmission. My Chevy SS holds three car seats in the back, two golf club sets in the trunk (for the kids and me), and goes zero to sixty in 4.7 seconds. Oh, and it sounds incredible.

Everyone has different joys in life. While my wife and I stayed in our $120,000 for the first two and a half years after residency, I did fall prey to financing a nice car. That’s what I used 65% of our 10% rule on after training.

Would I recommend this to anyone else? Absolutely not. It certainly isn’t how people usually get rich. Financing a car is financially stupid. There’s no two ways about it.

And, studies have shown us that spending money on expensive cars are unlikely to provide long term satisfaction. It is usually not one of the ways that money can buy happiness.

To be honest, expensive cars and houses are two of the most expensive line items that you can place into a monthly budget. Financing one is usually unwise. Financing both is financially irresponsible, particularly if you have student loan debt.

3. Food

Food brings us to the end of what people teach as the “big three” line items that make up the majority of spending for most Americans.

The focus here should be placed on eating out and eating expensively. Now, this can certainly be cheaper than the $650 monthly car payment that I pay each month (though it will be gone sometime in the next three to six months). But, if you eat out a lot, then you can easily spend more than my car payment.

Of course, some balance can be found here. And this is certainly one of the areas where you could apply part of your 10% rule, though based on the studies I’ve read I am inclined to tell you to spend your 10% on the next category.

4. Travelling

This is one of the “Big 5” that I blanked on in my podcast interview. It is unique in that – while spending money here will not make you rich – it will likely provide longer lasting fulfillment than the other expenses on this list.

For those that travel a lot, it can turn into a really expensive hobby! I know people who drop $10-20 thousand on a single family trip. And I know almost no one who makes it out of Disney world without spending $3-5 thousand.

However, we have to temper the “expensive” view on this a little bit, because this is one of the areas where behavioral finance and happiness economics studies have shown that money might be able to buy happiness. In this research, we learn that experiences with loved ones almost always trumps buying things (like cars and houses).

So, I encourage you to consider using at least part of your 10% raise on travel. And, if you do, I also encourage you to consider utilizing travel hacking with credit cards. My wife and I both signed up for a Chase Sapphire Preferred card and received a total of 200,000 points. I also signed up for an American Express Platinum card for another 100,000 points. I haven’t had to pay for a plane trip in two years.

With all of that said, this is one of the 5 areas you must put guardrails up. It is not worth spending 30% of your new income on travelling if you are $400,000 deep in student loan debt. Use a backwards budget to take care of business first, and enjoy what is left.

5. Childcare

This rounds out the top 5 most expensive things found in most households (that have young children). For the past two years, my wife and I have paid almost $2,000 per month for the hospital day care so that my wife and I could both work full time.

While there are tax-efficient ways to cut down on childcare expenses, kids are expensive no matter how you look at it. Kids usually don’t help you get rich.

Fortunately, your childcare expenses usually don’t change much after training. You already had to work long hours where someone was watching your kid.

If you are married and your spouse stays at home, that could save a lot of money here (though it also costs you pre-tax retirement space).

I list this as one of the Big 5, because it is for most people with kids.

Take Home: How to Get Rich

The name of this post was a bit of a hook. I don’t aspire to make doctors rich. I do want you to become financially independent and to claim the life that you deserve.

You’ve worked hard to get to where you are. Please, go enjoy a little bit of the increase in your take home pay! And, then, please do the responsible thing with the rest until you are debt-free outside of your mortgage.

Then, you can loosen up the purse strings a little more and maybe it becomes the 20% Rule.

If you fail to heed any of this advice, recognize that you might be setting yourself up for the dedicated road to burnout that most physicians pave for themselves. Instead, choose the road less traveled via the 10% rule; the road to financial independence.

Did you tame your lifestyle creep after training? What steps did you take to put guardrails on your spending? Do you have something else that goes in the Big 5 expenses? Leave a comment below.

TPP

2 thoughts on “How to Get Rich: Curbing Spending on the Big 5”

  1. Obviously this depends on the particular family but child care is our largest expense. That is just part time daycare. Not including the monthly 529 deposits we put in. Also not accounting for all the multitude of other costs that comes along with having children.
    As our kids age into public school then this will drop away and the mortgage will be top again. But for families who use private schools that would likely be their biggest expense for a while.

    Good to think about the big rocks!

    • Yeah, kids eat up a bunch of our budget, too. Full time day care costs us almost $2000 per month for two kids. Cannot wait til my little boy starts kindergarten this year. Most of it will be going to him two sister’s 529 though.

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