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June 15, 2015

Forget the Joneses and conquer your finances

Physicians are among the most studious, learned, industrious, sober, temperate and virtuous people with whom I have ever had the pleasure to interact. However, for some reason, the virtue of frugality seems to escape physicians entirely too often.

In fact, doctors are nearly universally regarded by financial professionals as exceptionally poor at managing money compared to other professions.

It’s time to embrace frugality

Frugality is, in essence, the opposite of "keeping up with the Joneses," the mythical family that lives next door who always seems to have the larger kitchen, the newer boat and the flashier car. Our society at large struggles with frugality, and often even derides it. Thrifty people who spend their money carefully on the things they most value are described as "cheap," "miserly" or "stingy." Scrooges. The truth, however, is that frugality is a core principle in not only acquiring wealth but in acquiring happiness.

As Matthew Cassell, M.D., an oncologist in Marion, Mississippi, puts it: "Having healthy kids, a loving spouse, vehicles that run, a roof over our head, and a stable job is about as good as life can get. The size of my house and the symbol on the front of my vehicle have no influence on my happiness. It’s a matter of contentment."

Why frugality is key for physicians

You have expensive loans

The first and most urgent reason to embrace frugality is something you’ve already encountered: the ever-expanding cost of a medical education. The cost of acquiring an M.D. or D.O. degree has ballooned over the last 20 years, with tuition alone increasing from as little as $6,000 to as much as $82,000 per year.

It is no longer unusual for physicians to finish residency owing more than $450,000 in student loan debt at interest rates of 6 to 8 percent. Even those who obtain significant forgiveness will still end up paying hundreds of thousands of dollars.

Rakesh Chaudhari, M.D., a neuroradiologist in Woodridge, Illinois, advises: "It should be a priority to pay those off rapidly. That loan needs to go away in five years if possible, 10 at the most."

The second reason physician frugality is important is that physician incomes in many specialties are trending downward due to the ever-increasing costs of compliance, the move to an employee model, and the downward pressure on reimbursements from public payers and private insurance companies.

The trend toward using high-deductible health plans has made the consumer more cost conscious, and also placed much of the burden of payment on the patient, who sometimes cannot or will not pay.

In short, many mid- and late-career physicians have found that they are making less money now, on an inflation-adjusted basis, than they did earlier in their career. Most physicians expect this trend to continue.

Physicians are 30 years old - and sometimes 35 or even 40 - before finishing their training. The portion of their career where they are actually earning a full salary is much shorter than it is for many other professionals.

Disability and life insurance can be very expensive. The less money you and your family need to live on, the less disability and life insurance you need to carry. The sooner you reach financial independence, the sooner you can drop expensive policies.

You’ve got taxes to consider

A physician may assume that an income of $200,000 per year - four times the median household income in the United States - would entitle him to a lifestyle that is four times as decadent as the average family.

However, once you incorporate the need for the additional tax due (along with the savings already mentioned), a doctor may find that four times the income is really only equivalent to twice the lifestyle. Underestimating the progressive nature of the income tax code, especially right out of residency, has led to the financial ruin of many physicians.

Society doesn’t expect you to be frugal

Matthew Cassell, M.D.
Frugality is a core principle in not only acquiring wealth, but also in acquiring happiness. "The size of my house and the symbol on the front of my vehicle have no influence on my happiness," says oncologist Matthew Cassell, M.D. "It’s a matter of contentment."

One reason physicians should be frugal is the very reason that so many of them are not: family, friends, and even the doctors themselves have an expectation that a doctor is rich and should spend like it.

Eric Raasch, M.D., a nephrologist in Cary, North Carolina, mentioned that his mother frequently utters the phrase "when you get your doctor house."

He has also noticed that the physicians’ parking lot at his hospital is filled with "Porsches, Maseratis, and the like." He says the hardest thing for him was "going to a dinner party at a neuroradiologist’s house and realizing that I didn’t even know what I was missing!"

Matt Cassell and family
Matt Cassell and family

I once traveled by boat across Lake Atitlan in Guatemala. There were no posted prices, but it quickly became very clear that there were two prices for passage across the lake: the local price and the vastly inflated tourist price.

There is also an inflated "doctor price" for many goods and services in our society.

But you should not feel that your status or income prevents you from negotiating, mandates you to live in a certain neighborhood or drive a certain type of automobile, or requires you to pay in a situation where others might not. Fear of looking "cheap" might just make you have to be cheap in retirement.

Physicians also often feel that money is their most easily renewable resource. However, that income stream may not last nearly as long as you hope. I assure you it is just as easy (perhaps easier) to overspend your income as a physician as it is with any other career.

You want financial freedom

When you are living on the edge (or worse, over the edge) of your income, every drop in reimbursement, personal or family illness preventing you from working or contract scare becomes a financial emergency. Work is a lot more fun when you do not desperately need your paycheck.

Financially secure physicians can determine how much they wish to work, when they wish to do so, and how they will practice. They essentially buy immunity from financial threats to their practice style.

Prudent money management and weight maintenance are remarkably similar. Both are simple, but not easy. Success in either area is the result of thousands of tiny decisions made over decades.

If you wish to be thin, you had best do what thin people do. If you wish to be financially secure, comfortable, wealthy - or even rich - then do what rich people do.

In their classic treatise The Millionaire Next Door, Thomas Stanley and William Danko enlightened America on what millionaires really look like. It turns out they drive Ford F-150s, hate caviar, wear inexpensive watches and suits, and are more concerned with being financially free than living an ostentatious lifestyle. Income matters, of course, but it turns out that "out-go" matters far more.

The physician’s guide to frugality

Want to embrace frugality and financial freedom? There are five principles to follow.

Principle 1: Realize that money does not and cannot buy happiness.

That statement, of course, is not entirely true. It turns out that money does buy happiness, up to a certain point. Academic studies suggest that point is about $75,000 per year, far less than almost all physicians make.

Many physicians can, within reason, buy anything - but not everything - they want. The art of frugality consists of using your money to purchase those things that will bring you the most happiness. Experiences, especially experiences shared with those we care about, are generally much more likely to bring happiness than actual things.

As such, a physician may be faced with the choice of purchasing a $60,000 sedan or taking his family to Europe six times. When faced with similar decisions, choose the one that will make you happiest.

Principle 2: Avoid growing into your income all at once.

This is incredibly important that first year out of residency when your income jumps from $50,000 a year to perhaps $250,000 per year.

It is much easier to never increase your spending than it is to cut it back. Graduating residents will still "feel" a huge raise by spending $75,000 (a 50 percent raise), and can use the additional income to save up for down payments, pay off student loans, and catch up to their college roommates by stuffing their retirement accounts full.

Adrienne Collier, M.D.
New car? New house? Not in your first one to two years after residency, advises pediatrician Adrienne Collier, M.D.

Adrienne Collier, M.D., a pediatrician in Bowie, Maryland, recommends, "Do not buy a new house or a new car within one to two years of completing residency."

Chaudhari says he could have used that advice. "My first year as an attending I fooled myself into thinking that I wasn’t keeping up with the Joneses; I was just doing what all 35-year-olds who are married with children do. I closed on a house in my last month of fellowship and bought a car in my second month out and started filling my house with expensive furniture and audio/visual equipment. It took two years of seeing my hard-earned money going out so quickly to energize my resolve to start changing my ways."

Principle 3: Remember that big things matter most.

Personal finance books love to talk about "the latté factor," which is the fact that small expenses, paid daily, quickly add up into huge sums. You may have heard things like, "that $5 latté costs you $1,500 a year."

However, the real money is not found by cutting out your daily latté. The real money comes from the money you spend on big items - especially your housing and taxes.

A recent study from Redfin showed that a typical physician in San Francisco could only afford to purchase 23 percent of the houses in the city. That number was over 96 percent in the vast majority of the country.

Physician incomes tend to be very similar in both high and low cost of living areas, and in states with high-income taxes, low-income taxes and no income taxes.

Aim to spend less than 20 percent of your gross income on all of your housing-related expenses, and try not to carry a mortgage higher than two times your gross income. Also consider carefully where you choose to practice. Though Northern California may initially seem more attractive to you than Texas, Indiana, Georgia or Arizona, once you factor in that you will have a house one-quarter of the size, will only be able to go on half the vacations, and will have to work five years longer to retire, practicing in an expensive city may no longer be quite so attractive!

Principle 4: Believe that you are not what you drive, wear, or live in.

A physician recently commented to me that it was impossible to live on $50,000 per year. It is a good thing that half the people in his city weren’t aware of that, as they are doing just that.

Ask yourself if you really want to be around people who actually care about what you drive to work each day or what brand of clothes you wear. If you don’t care, why do you assume that others care what you drive?

The least frugal way to drive cars is to upgrade them every two or three years. It is reasonable to purchase used, inexpensive cars. It is also reasonable to purchase a new car, so long as you hold on to it for a decade or more.

Many physicians will be surprised to learn that their frugal colleagues have never actually had a car payment because they purchase all of their cars with cash and "drive them into the ground."

David Spilker, M.D., a retired emergency physician in Pebble Beach, California, drives a 41-year-old Mercedes he bought new in 1973. "Money made during internship was big money to me. My father was raised on a farm and instilled in us a good work ethic. I have never lived the ’rich’ lifestyle," he says.

Principle 5: Limit your fixed expenses.

Large mortgage payments, property taxes, student loan payments, vacation homes, expensive cell phone contracts, car payments and private school tuition are all difficult to cut back on when money becomes tight, which it eventually will for one reason or another. Variable expenses like vacations, one-time purchases, retirement savings, food and entertainment costs are far easier to decrease when income is low. Try to minimize the percentage of your income that is already spoken for each month.

Frugality is a virtue for physicians and non-physicians alike. Those who learn practical money management skills as early as possible in their careers will benefit from lower stress, more freedom to live and practice as they choose and more happiness.

James M. Dahle, M.D., FACEP is the author of The White Coat Investor: A Doctor’s Guide to Personal Finance and Investing and blogs at whitecoatinvestor.com. He is not a licensed financial adviser, accountant or attorney and recommends you consult with your own advisers prior to acting on any information you read here.



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