Financial Planning for Doctors

Before my financial awakening a few years ago, I made a lot 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.  These mistakes happened for a variety of reasons.  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 myths that explain  why doctors are bad with money.

Money Myth #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 so overwhelming that you might as well forget about adding money to the pile.  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 (or can you?) afford as soon as you finish training, or eating out every day as a medical student.

While you are in medical school and 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.

Money 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. [I’m all about balance… utilize intentional spending habits to sort this out]

Money Myth #2: When we Start Making Money, Our Financial Decisions Will Change

The vast majority of people I meet fall for this one.  In fact, I fell for it, too, when I was in training.  As human-beings, 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 when you cannot afford them now, this will likely continue even when your income increases.  If you cannot figure out a way to give to charity, pay back some student loans, or invest money in the market on a resident salary – you likely won’t do a whole lot better when you finish.

In other words, 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 enough later.  You’ve already gotten used to bad habits.

Instead, build your financial muscles early by creating good habits.  Even if this starts out as a small percentage of your income, learn to automatically build wealth early on and it will pay off later.

Money Myth #2: You’ll make smarter financial decisions when you earn more money as an attending physician (or after the next promotion, raise, etc).
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.

Money Myth #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.  Is that really the modern day definition of rich?

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.  Driving a fancy car or living in the big house does not make you rich.  This is because 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 equates with 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. We see this phenomenon in professional sports every year.

It simply means that they like to spend money, which is probably 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 the big doctor house after you finish training.

Instead, 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.  You’d probably judge them if you saw them hopping into an M5 BMW that they are financing.  You probably shouldn’t either.

Money 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.

Money Myth #4: Investing in Residency Will Not Matter

We have touched on saving in residency before.

This section requires a qualifying statement. I do not recommend every resident invest during residency.  If you have debt, and are privately refinanced hopefully through a student loan refinance ladder.  Then, pay off your debt.  Don’t invest.

However, for some residents investing makes sense.  This is for those people.

The Lie

Let’s play a game called one lie, two truths.  First, the lie.

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.

Truth #1: The Math

Part of this is a mathematical question. 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 $6,000 per year.  Let’s further say that you are in a five year general surgery residency.  This will be a total of $30,000.  How much will that be worth when you start using it in retirement?

Roth money is often used last in retirement, because of the advantages it provides – no required minimum distribution, tax has already been paid, etc.  (For now, 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 $30,000 that you saved in residency be worth?  The answer (assuming 6% growth) is $295,330.  If it grows at 8%, you’ll have more than $600,000.  Still think that investing in residency isn’t worth it?

Truth #2: Behavioral Finance

Let’s keep this short, because we alluded to it earlier.  If you can learn how to save money as a resident, you are much more likely to be able to save money with ease as an attending.

It’ll be built into your DNA and those savvy financial muscles will be at full strength from those years of training.

Money Myth #4: Saving during residency won’t matter in the end.
Truth #4:  Both math and behavioral finance would tell you that saving money during residency is a good thing.

Money Myth #5: Spending Money is Bad!

For those that were brave enough to read this far, I’ll save the best for last.

Life is about moderation.  While many physicians spend too much money, save too little, and become the statistical physician who cannot retire at age 65 despite earning millions… the people reading this post probably err in the other direction.

The fifth myth is that we need to become minimalists, pursue FIRE at the earliest possible age, and save until we cannot save any more!

Let me air this out. I think that financial independence is an important way to battle the current burnout epidemic in medicine because it provides options.  Working because we want to, and not because we have to provides a powerful position.

That said, if we focus all our energy on getting there as early as possible, we may be missing out on today.  We must find the balance between paying ourselves for tomorrow while we live today.

So, while you need to paint the big picture of your financial life (I recommend using The Three Kinder Questions), and save enough to get to your goals… I think it is also important to spend lavishly on the one (or maybe two) things that you absolutely love.

As long as you are meeting your financial goals FIRST, I think it is really healthy to spend what is left on what you love.  If you need guardrails for how to do this, I recommend using The 10% Rule – which is the tool my family and I used to find financial success.

Money Myth #5: Spending money is evil!
Truth #5: If you are meeting your big picture financial goals, I encourage you spend money however your heart pleases with zero guilt and judgement.  Enjoy today while you save for tomorrow.

Take Home

Don’t let money myths lead you astray.  Instead, listen to the truth.  Don’t 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.

TPP

13 thoughts on “5 Money Myths That Explain Why Doctors Are Bad With Money”

  1. #3 is important for folks in the Washington DC area. We live in the “richest” area in the country if you measure by median income. But most of those folks spend SO much on their house and especially cars/vehicles that they’re in debt – despite both parents earning 6 figure incomes in most cases. It’s a land of high income and low net worths

  2. Excellent mythbusting TPP.

    I unfortunately fell for most of the traps early in my career and residency.

    Fortunately I saw the light and made a great financial turnaround. But old habits are definitely hard to break. The drop in the bucket regarding debt is a big one. You have the mentality that you can pay it off quickly once the big money rolls in but typically you have either had lifestyle inflation or life circumstances occur (like starting a family) that will find ways to part your money from you.

    I have already started telling my daughter that just because someone looks wealthy doesn’t mean they actually are. It can definitely all be a facade which can come crashing down with one minor financial hiccup.

  3. Yeap that is so true. “It is the most common reasons physicians stay poor they simply like to spend money…” I find that true in every profession. Not how much you make but how much you keep.

  4. Great post on true lies.

    There’s nothing sadder than someone making $250,000 a year living paycheck to paycheck because they overspend and overborrow.

    I agree with Doc G – this one is universally applicable.

  5. I’m living proof that #4 is a total lie. Investing during residency does matter. I did it by maxing out my 403b and Roth IRA (while paying off student loan debts). My investments have grown handsomely during the economic recovery and accounts for a decent chunk of my growing new worth.

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