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When asked for my best tip for doctors and others to grow wealth and become financially independent, I usually answer with three words that echo the warning from the loudspeakers as you enter the subway car in London’s “tube.”
Mind the gap.
That is, mind the gap between your earning and spending and do what you can to grow it. One way to do that is by earning more, and I do encourage that. The other is to spend less, and I have to agree with Dr. Jim Dahle, the author of today’s Saturday Selection. Some doctors spend too much and simply don’t realize it.
He explains why in this post, which was originally published on The White Coat Investor.
Once every couple of years I have medical students from the local medical school over for dinner. At some point, the conversation usually turns to finance, and I commiserate with them about their loan burdens. I typically toss them a few pearls of wisdom, wish them good luck, and we move on to something else.
They always think it’s funny when I say, “If you can’t live on $200,000, you have a spending problem, not an earning problem.” Of course that’s true, they think. They can’t even imagine why I would say such a thing, since no doctor can possibly have trouble living on $200,000.
I almost never use that line when I’m talking to attendings, even though it is no less true. It comes across as preachy, and sometimes impossible. Why is that? Well, it’s because doctors spend too much money. I’ve spent a lot of time thinking about why that is and came up with 10 reasons. Let’s talk about them.
Top 10 Reasons Doctors Spend Too Much Money
#1 Pent-Up Deferred Gratification
Reason number one is that we deferred gratification for so long, that when we first start getting a real paycheck, instead of having a little lifestyle inflation, we have a lifestyle explosion. When you tell yourself the big money is coming for a decade or a decade and a half and then it finally arrives, well, it seems like time to buy a bunch of stuff you’ve been putting off for pretty much, well, forever.
#2 Lack of Understanding of Our Progressive Tax Code
Another issue is that docs don’t have much financial literacy. In particular, they don’t understand how the tax code works. They see that their salary after residency will go up by five or six times, so they assume they can spend 5-6 times as much as they did during residency. They forget that 1/4 to 1/3 of their earnings will go to the taxman.
A 300% increase in net earnings is still great, but it is very different from a 500% increase. To make matters worse, doctors put off a bunch of things during their training (see #1 above) and those things include saving up a down payment, starting retirement accounts, getting enough insurance in place, and paying off their loans. Add those things on to the tax bill and all of a sudden their increased spending potential is really only 50%-100%.
#3 Societal and Family Expectations
Another major difficulty for doctors is that everyone else sees them as rich, even if their incredibly negative net worth actually ranks them as being some of the poorest people on the planet. Their parents, siblings, spouse, children, and physician partners all have expectations that their spending will be in keeping with their new position in life. Except their financial position hasn’t actually changed.
They may also be hanging out in a circle of high-earning friends, and feel some pressure to keep up with the Joneses with regards to vacations, schooling, transportation, housing, recreation, and children’s activities.
Here’s an idea—make it easier on yourself and start hanging out with like-minded peers on the WCI Forum, Facebook, or Reddit groups. This is a circle of friends that will help you fight and win the battle of expectations. [PoF: I’ll add in a plug for my Physicians on FIRE and fatFIRE groups, although the latter may not be helpful in this regard.]
#4 A Sense That Money Is Their Most Renewable Resource
Some doctors get this idea in their head that they can get $15,000, $20,000, $30,000, or even $40,000 every month for the rest of their life. They can’t ever foresee a period of time when their income could drop or they might not be able to work (although the COVID economic downturn gave many their first experience at a massive drop in income). They have staked their entire financial plan on being able to work until the day they die.
Sometimes, they add on a disability policy to protect that income, but they often cannot protect the entire wad. Plus, there are a lot of things that can cause your income to drop that can’t be insured against, like complaints to the medical staff or medical board. And disability insurance only pays until your mid-60s, anyway. At a certain point, they will need either savings or another source of income.
#5 People Spend What’s in the Account
Doctors are people, just like everybody else. People spend what they can see.
If there is $1,000 in the account, they figure they can spend $1,000. If there is $10,000 there, they spend $10,000. I mean, it’s not quite “I didn’t know I was out of money, there were still checks in the checkbook,” but sometimes it isn’t much better.
#6 Not Sure What to Do When Retirement Account Is Full
Some doctors don’t understand that they can save for retirement outside of their employer’s retirement account. And that might only allow for $19,500 a year, hardly enough to fund the desired retirement of most physicians, especially if they don’t start early or don’t invest it aggressively.
Many doctors don’t even know about Backdoor Roth IRAs, Stealth IRAs, and Individual 401(k)s. And heaven forbid they invest in a taxable account. They’d rather buy whole life insurance as their “financial advisor” recommends.
#7 Disconnected from Middle Class
Many doctors become disconnected from their middle-class roots or never had middle-class roots in the first place. These are doctors who think that cars that have more than 50,000 miles on them aren’t reliable. Or that a $20K car is a beater. Or that the local state university can’t possibly provide a decent education, much less the local public schools.
They must shop at Whole Foods, not Walmart. They can’t imagine flying coach on an overseas flight. I’m always amazed that the public schools are just fine according to people who don’t have the cash to send their kids to private school, but that apparently 95% of the country has terrible public schools if you ask doctors or their spouses.
I’ve even been told that the public schools in towns I’ve lived in are “terrible” despite all objective evidence to the contrary. I’m told it is impossible to live on a resident salary, when fully half of the households in the country seem to be able to get by on less than that.
#8 Don’t Realize Just How Much Must Be Saved for Retirement/College
Some doctors spend too much because no one ever told them they need to save 20% of their gross income for retirement. They simply haven’t run the numbers and realized that they need to save a massive chunk of their income if they actually want to meet their financial goals. Even at the State U, college is expensive stuff, but that’s nothing compared to retirement.
Most physicians will need a multi-million dollar nest egg to maintain their standard of living after retirement. That doesn’t just magically appear at the end of 30 years thanks to the miracle of compound interest. A big chunk of it actually has to come from brute force savings.
#9 Don’t Understand That Doctors Aren’t All the Same
Sometimes doctors think that just because they went to medical school with somebody that they should be in the same socioeconomic class. Guess what? There’s a big difference between your possible lifestyle when you’re an academic pediatrician making $150,000 and a plastic surgeon making $750,000. That surgeon can make all kinds of financial mistakes and waste all kinds of money and still come out smelling like a rose. If that pediatrician tries to live like the surgeon, it isn’t going to end well.
Even high-end doctors fall into this trap. They know they’re in the 1% but they forget that the 1% encompasses a very wide range of incomes. Too seldom do we look at those who make less than we do and feel gratitude for our income, because we’re too busy enviously looking at those who make more than we do.
#10 They Think Spending Brings Happiness
Sometimes doctors and other high-earners fall into the trap of thinking that they can spend their way toward happiness. That bigger house and nicer car will surely make us happier, right?
The next step after realizing stuff doesn’t make them happy is to start seeking experiences. They travel the world and take up all kinds of crazy new hobbies. But, in the end, there are really only three things we need to be happy, and none of them cost much money:
- Someone to love
- Something to do
- Something to look forward to
I mean if there is something or some experience that you can buy that you think is going to make you happier and you can afford it, then go buy it. But pay careful attention to how much happiness you actually get from it and adjust future spending accordingly.
Many of my favorite vacations and trips are the cheapest ones. And I can assure you I’m no happier driving my wife’s 2016 Sequoia than my 2005 Sequoia, even if hers does get the boat up the hill a little faster. You can never get enough of what you don’t need.
There you have it. Ten reasons why doctors spend too much money. Did I miss any? Why do you think doctors spend too much? Comment below!
14 thoughts on “10 Reasons Doctors Spend Too Much Money”
Jim, I get your point, but I think the debate is apples and oranges.
It’s very difficult to get to a negative 250k net worth, so the statement graduating doctors are among the poorest on the planet is true for sure.
What you are referring to is that doctors are intellectually gifted and hard working, and that their potential to become rich going forward is much higher than the average person. They are, of course, blessed in this view.
One point that I think should be mentioned is that spending money may arise from fear of a large malpractice judgment. Money on spent on homes or “experiences” may be viewed as “something that can’t be taken away.” I thought some readers might like this study “How (else) do physicians respond to malpractice liability?” from the Claremont RAND Institute. The study noted the following “The hypothesis is that in states with unlimited “homestead” exceptions—provisions of state law that protect debtors’ home equity when they file for bankruptcy—physicians will purchase comparatively more expensive homes than in states without such exceptions. We find that unlimited homestead exemptions induce physicians to invest approximately 13% more in the value of their homes compared to what they would have invested in the absence of an exemption. These findings suggest that physicians take financially costly decisions to protect themselves from uninsured losses.” (link below)
Personally, I don’t think this is a wise course of action (my home, for instance, is MUCH less than a “regular” physician’s home) but it does point to an area that I don’t think is recognized as much as it should — fear is a potent, and sometimes unconscious, motivator.
Regardless, I think the Wise Coat Investor will get a kick out of the neat equations in the article..
https://law.utexas.edu/wp-content/uploads/sites/25/Eric-Helland-homestead-paper-7-9-2015-CELS2.pdf
This is such nonesense! Doctors are not “some of the poorest people on the planet.”
They are among the highest paid professionals in America, who are treated with extraordinary respect by society. Their career arc isn’t that different from college professors, for example, who also study for a long time before ever getting a professional job and salary. The difference is professors don’t make 5-100 times what everyone else makes.
For crying out loud, we just had an article earlier this week by a doctor making $1 million a year, crying about how $10 million in net worth is insufficient. Good grief!
Except income doesn’t = net worth. My sister’s PhD didn’t cost her anything close to what it costs to become a physician.
That statement refers to the fact that most doctors emerge from medical school with a net worth in the NEGATIVE six figures due to their massive educational debt. So yes, compared to even a homeless person who objectively has a net worth of $0, newly graduated doctors are among the poorest among us.
The average medical school grad would have a net worth of Zero if someone handed them over $200,000 in cash.
That’s what the good Dr. Dahle was referring to — the indebtedness of most newly minted docs making them much more poor than someone who’s simply broke.
Best,
-PoF
Seriously, come on. I know this is a site devoted mostly to doctors, so I’m probably never going to win this argument, but there is no way any serious person would consider someone who has the earning potential to make $1 million+ a year to be among the “poorest people on the planet.”
For a very brief moment in time, yes, they have a negative net worth. So do many many other people, thereby making them equally poor. The key difference is that doctors have enormous earning potential and will never go lacking in any basic necessities ever in their entire life.
I think you all need a reality check.
I spent my career founding and running a nonprofit helping low-income students get to college. Trust me, highly educated doctors, who have enormous earning potential, are definitely not among the poorest people on the planet. They are among the most privileged people ever to walk the earth. They are respected by almost everybody and make more money in this country than almost anywhere else on earth.
Dr. Dahle should have qualified or clarified with a couple extra words.
“Another major difficulty for doctors is that everyone else sees them as rich, even if their incredibly negative net worth early on actually ranks them as being some of the poorest people on the planet.”
Arguing that professional students (I’d lump dentists, attorneys, veterenarians, etc. in here) with $200,000 to $500,000 in student loan debt are anything but poor is a losing argument. Yes, they have excellent earning potential, but two birds in the bush is not a bird in hand.
Net worth is a snapshot, and if you don’t have anything to your name, you are, by definition, broke. That’s just reality.
As an aside, I appreciate what you did for others in your career. That’s noble work.
Best,
-PoF