This series is developed in partnership with Dr. Jim Dahle‘s The White Coat Investor, the leading source of financial tools and information for doctors, and Doximity Careers and Curative (a Doximity company), where doctors can find their next long-term or locum tenens position.
Most of society assumes that physicians are wealthy. In reality, most physicians are “HENRYs”—High Earners, Not Rich Yet. The general public, politicians, and even the IRS sometimes mistakes income for wealth. Just like other citizens, physicians often live hand to mouth or worse and never build real wealth. Wealth is measured by net worth—a calculation of everything you own minus everything you owe. Surveys of physicians consistently demonstrate that only half of physicians are millionaires. Of even more concern, surveys show that 25% of doctors in their 60s are still not millionaires and 11-12% of them have a net worth under $500,000! Obviously completing a 20-30 year career earning a six-figure salary and having less than half a million to show for it at the end is a serious financial catastrophe.
Most entering medical students do not go into medicine for the money, but they all assume that they will become wealthy as a by-product of their career choice and hard work. Despite their high incomes, the process of building wealth as a doctor is not automatic. There are a few required steps.
- Earn a lot of money
- Don’t spend a lot of money
- Make sure your money works as hard as you do
- Protect your money from financial catastrophes
By following these four steps, every doctor should be able to not only be a millionaire by the end of their career, but should be able to maintain their pre-retirement standard of living throughout retirement.
The first step is to maximize income. Many doctors are surprisingly naïve about their value. The range of income even among full-time doctors within the same specialty can be hundreds of thousands of dollars. Understanding your value, negotiating to make sure you are receiving it, and improving your efficiency can all result in a higher income. Additional sources of income include both clinical and non-clinical side gigs as well as investments.
Have a High Savings Rate
The second step is where you play defense. The less you spend the more of that gross income you can carve out and use to build wealth. At a minimum, 20% of an attending physician’s gross income should be dedicated to retirement savings, inside a retirement account if possible, outside if not. Early retirement will likely require a higher savings rate. Paying off student loans and saving for college, vacations, cars, or recreational toys is all in addition to that. The vast majority of a six-figure income does not go toward true needs, so budgeting for high earners is really just a process of weighing your wants against each other to decide what you value most.
Put Your Money to Work
Once you have money to invest, you want it working hard. Minimize taxes, transaction costs, and advisory costs. Capture the market return by using index mutual funds instead of day trading stocks or trying to find a guru to beat the market. Ensure you are taking adequate amounts of risk, which usually means a majority of the assets in your portfolio are invested in riskier, but higher returning, assets like stocks and real estate. Maintain good investor behavior—rebalancing the portfolio periodically, not selling low in market downturns, and staying the course with your written investing plan.
Protect Against Financial Catastrophe
Finally, it is important not to lose all of your money in one fell swoop. Selling low in a market downturn is one method of doing this, but there are plenty more. Death, disability, and divorce commonly devastate the finances of physician families. Be sure you have adequate life, disability, health, property, and liability insurance policies. Avoid losing your license or credentialing due to inappropriate or illegal behavior. Take basic asset protection steps like maxing out retirement accounts and titling your property properly and remember date night may be your best asset protection technique. The old saying goes, “One House, One Spouse, One Job” and it contains a lot of truth. It is expensive to change houses and jobs, but divorce can be absolutely devastating. In divorce, you typically divide both your assets and your future income in half! When combined with increased expenses, that can make it very difficult to build wealth, especially if you do it more than once.
Since wealth is measured by net worth, you can build wealth both by investing and by paying off debt. Often, your best investment is paying off debt. Paying off a 7% student loan provides a guaranteed 7% return, far higher than you are likely to find with any other investments offering guaranteed returns. With lower interest rates and riskier investments, you may find that you are willing to carry debt a little longer in order to invest. Be careful how much leverage you take on in your life though. Experts recommend you owe no more than 15-33% of your net worth, and most doctors come out of school with far more than that. Nobody ever declared bankruptcy without debt and the majority of physician multi-millionaires have little to no debt. The same character traits that lead them to save and invest large portions of their income also lead them to pay off their debts much faster than required.
There are essentially five financial tasks that can be done in life: earning, saving, investing, spending, and giving. All require education and continual effort to do well. As you develop financial literacy, become more disciplined, and gain experience, each will become easier and you will find that you can use your physician income not only to build your own wealth, but also to bless the lives of those around you. At the end of the day, your hearse will not have a trailer hitch. While financial security is important, never forget that money is simply a tool and should be put to its best possible use.
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