One of our most memorable client moments came when a physician was self-deprecating enough to make the following statement:
“Do you know what MD stands for?” he asked. “Money Dumb! Do you know why? Because in 15 years of post-high school training, I haven’t had one class in economics, finance, budgeting, contract negotiations, or business, and yet, now I’m supposed to be an expert in all of these!”
We can think of no other field where a professional is expected to manage so many variables for which they have received so little training. Without this solid understanding, you are more likely to end up like many of the physicians we encounter at the later stages of their career: owning lots of stuff, but lacking true assets.
This book is designed to help you save or recapture millions of dollars over your lifetime, but we would be remiss to not first acknowledge that at best, money is only a very small part of true wealth. Israel’s King Solomon may have been the wealthiest man to ever live. In his excellent book, The Richest Man Who Ever Lived, Steven K. Scott shares that King Solomon’s gold alone was estimated to be worth hundreds of billions of dollars. During his rule from around 970 to 930 BC, Solomon amassed wealth estimated to be many times greater than that of any of the world’s wealthiest technology oracles today. (2) Reflecting on his massive fortune in the later years of his life, Solomon poignantly summarized the same emotional challenges that we often see physicians facing after finally building substantial income and/or assets at a relatively young age:
So I became greater than all who had lived in Jerusalem before me, and my wisdom never failed me. Anything I wanted, I would take. I denied myself no pleasure… But as I looked at everything I had worked so hard to accomplish, it was all so meaningless–like chasing the wind. There was nothing really worthwhile anywhere. (Ecclesiastes 2:4-11) (3)
Solomon achieved the modern-day American Dream. He was financially independent and had everything he could ever want in the form of material possessions. Yet he realized that this material wealth, on its own, was all meaningless–like trying to chase after the wind. Solomon further explained his realizations about false success in a later passage:
Those who love money will never have enough. How meaningless to think that wealth brings true happiness! The more you have, the more people come to help you spend it. So what good is wealth– except perhaps to watch it slip through your fingers! People who work hard sleep well, whether they eat little or much. But the rich seldom get a good night’s sleep. (Ecclesiastes 5:10-12) (3)
Solomon eloquently emphasized that wealth is not a sure path to happiness. Consider that although physicians rank in the top 1% of wage earners in the United States, their marriages are often less happy than the general population. Many families have learned the hard way that wealth does not lead to automatic happiness in all facets of life–including marriage. Conversely, wealth can actually be a root cause of incredible family tension if not put in proper perspective.
Wayne and Mary Sotile discuss this phenomenon poignantly in their book, The Medical Marriage: (4)
They also share the words of a specialist, who made the following inquiry,
I’m a ‘rich doctor,’ right? So why do I lie awake nights trying to figure out how we can keep this lifestyle of ours afloat on less money? It costs more than we ever expected.
Finance-related tension is not exclusive to marriage; it can trickle into other relationships as well. Take for example the physician and his sister who no longer speak to each other because he wanted to keep their dad’s farm and she wanted to sell it for cash after he passed. Or the business partners who spent years working together for peanuts to build a multimillion-dollar specialty practice. All of that work only to have their relationship torn apart when the money finally started pouring in, and they could not amicably agree on how to divide the profits.
The simple truth is that most things in life are more important than obtaining wealth. The most fulfilled physicians we know use money as a tool, but they never allow money to become the focus of their life or family. Although they are often capable of managing the ins and outs of their financial lives, many times they delegate these responsibilities to trusted advisors. This provides them with the opportunity to devote their time, efforts, and energy to areas that are more important: their family, their careers, their hobbies, their faith, and so forth.
Though delegating their financial life to a professional is not the ideal solution for every doctor, we would suggest that unless you absolutely enjoy financial planning and you are willing to make a daily commitment to continued financial education, your family will certainly miss out on maximizing its full financial potential.
Most doctors do not want to spend time each day dealing with their financial lives; instead, they want their family’s finances to be less of a focus. If you are part of this group, you would be much better off hiring advisors whose sole mission is to ensure that your family takes advantage of the many strategic financial planning opportunities available.
This often prompts a great question: How can you know which advisors to trust with your financial future? Let’s face it, these days everyone claims to be a “financial planner”–your banker, your auto insurance agent, your stockbroker, and the guy who sells insurance down the street. Shocking as it may sound to a physician, in the financial world, the CFP®2 and CFA board exams are totally optional for advisors, and few advisors ever take either of them. This is the financial industry’s equivalent of a family medicine physician listing himself as a neurosurgeon. This would not be permissible in the medical world, but in the financial sector, this misclassification of advisors is all too prevalent.
When it comes to your family’s financial health, it is important that you place your trust in someone who is actually trustworthy. By understanding the right questions to ask, you’ll have a better chance at making that decision. It is for this reason that we provide you with a series of questions to ask any advisor you have hired or are contemplating hiring. This list begins on page 212 at the back of the book and is a great tool for evaluating your current advisor(s) or identifying a reputable new one.
Building a Financial Plan
Most physicians’ lost financial potential is not caused primarily by poor investment choices. Rather, it is a lack of coordination across all areas of their financial lives that cause most doctors to give up their greatest potential. This book distinguishes ten important planning areas that every doctor must address in order to build and implement a properly balanced and coordinated financial plan.
Areas to Address in a Coordinated Financial Plan
Employee Benefit Plans
A good financial advisor specializes in helping you put each of these pieces together into one comprehensive and well-managed plan. Physicians often demonstrate that this coordination can mean the difference between hundreds of thousands–to millions–of dollars of additional wealth over their lifetimes.
Take for example many doctors and dentists who have a large balance in their 401(k) or 403(b) plan through their practice. It astounds us that many of these investors have no idea that along with their account balance, their tax burden is also compounding throughout their working years. Without coordinating their future tax situation with their investment decisions today, they could face disaster when they reach their retirement years.
We liken this financial coordination to a big jigsaw puzzle. If just one piece of the puzzle is missing, everything else becomes distorted.
This book’s ten chapters cover each of the important areas of your financial life. While each chapter can stand alone, it is vital that your financial plan addresses all of them in a coordinated fashion. This is exactly what a Financial Advisor who works exclusively with physicians has been specifically trained to do.
The goal of this introduction is to help you realize that you can go in one of two directions with your family’s financial future.
- You can devote a significant amount of your time on a regular basis to stay abreast of financial issues, and continue to manage your family’s financial playbook on your own. If you follow this path, do so with extreme caution. Physicians face a “crisis of overconfidence” as it relates to their own financial abilities. Consistent studies document that the more confidence a physician has in his or her own financial expertise, the less likely he or she is to actually be correct in this assessment. (5) (6) Stop taking financial advice from your colleagues. The odds are that this advice will not be right for your unique situation.
- Alternatively, you can delegate this work to a specialized professional so that you can spend your time following your passions, rather than worrying about how to finance them.
At the end of the day, our hope is that every physician is being properly served when it comes to his or her financial life–either through his or her own efforts, or through those of an advisor or team of advisors. We want your financial life to be an area of peace for your family, not a source of stress. That outcome will only occur when your financial decisions are properly aligned with the core values you share for your family, and when each piece of your financial life is working together in harmony with all of the other pieces.
If this book helps to move your family closer to this outcome, we will have accomplished our most important objective.
C H A P T E R 1
and Regain Peace of Mind
“The things you own end up owning you.”
Main character from the movie Fight Club (7)
At an educational workshop we hosted for resident physicians at a prestigious institution, a final-year resident remarked, “I was so glad to have signed a contract with a practice two years before graduating. They have been paying me $2,000 per month as a forgivable loan during my last year of training. That gave me enough extra cash to lease a car for $970 per month during residency.”
This physician got to his new practice, and quickly learned that the partners expected him to work 90 hours per week, and take the majority of the call time required of their group–things they had previously failed to mention. His family made the decision to move on to another practice, but the forgivable loan had to be paid back to the group in full.
The most basic foundational requirement to a successful financial life is learning how to manage your cash flow and live well within your means. The way you spend your money influences all other areas of your life. Without a plan for managing income, most physicians waste more than $3 million in poor spending, investment, and home-buying decisions, etc. Without a plan, money will inevitably find a way to leave faster than it arrives. An ancient prophet once proclaimed,
It is imperative that you have a plan for your income. Without a plan, physicians rarely develop the habits necessary to keep their hard-earned income in their own pockets.
The Phases of Income and Wealth Building
The habits needed for successful money management differ at various stages of your practice. As you progress in your practice, three distinct phases of life will all create different cash-flow management opportunities and challenges that require the establishment of new habits.
- Phase I: The Lean Years–Survival
- Phase II: Disposable Income–Success
- Phase III: Meaningful Wealth–Significance
Phase I: The Lean Years–Survival
Phase I begins upon completion of medical residency or dental school. At this point, student loans are usually at their peak, and unless a spouse was working or parents were helping financially, credit cards are often part of the equation. Bottom line: Very little cash is set aside in savings and investments.
This is normal. Cash flow was probably very tight prior to graduation. At this point, the goal is not so much to accumulate massive wealth as it is to begin building solid financial habits that will persist throughout your lifetime.
Phase II: Disposable Income–Success
Phase II begins once the high-interest consumer debt is finally paid back, and you have had the opportunity to build up some emergency reserves. The point of entry into Phase II is often the most critical phase on the road to wealth for a young family. It is at this crucial juncture that families must decide how to handle their newly acquired cash flow. If this conscious decision is never made, most families generally default to spending every dime of additional income, and do not save enough for the future.
Before reaching Phase II, it may seem absurd that someone could actually spend ten times as much income from one year to the next. However, our experience proves that Solomon’s wisdom is true: Expenses, by default, rise to meet income. The goal throughout the Disposable Income Phase is to avoid the “default” experience, and to ensure that your cash flow pattern allows for saving a meaningful portion of your much-increased income on a regular basis.
Phase III: Meaningful Wealth–Significance
Phase III begins as financially successful physicians accumulate assets of $1 million or more. At this point, the family has the opportunity (and often the responsibility) to move their financial stature from a position of success to a position of true significance. With good planning, these physicians have the ability to make a meaningful societal impact by leveraging their time, talents, and treasures to the causes they are most passionate about. The financial planning required at this stage of the game becomes more advanced, but it also greatly impacts the bottom line of the family’s net worth.
Spenders vs. Savers
During these phases of life, we believe DNA and family upbringing both have a lot to do with the financial habits that are developed.
The size of income does not matter if spending always exceeds it. This may seem obvious, but we regularly encounter doctors who struggle with this; they always seem to live just a step ahead of their income. Nothing will get a family into bigger financial trouble more quickly than the propensity to consume more than they earn. Remember the words of King Solomon from the Introduction, “Those who love money will never have enough.” (3)
The financial issues we face today are the same ones prominent citizens have struggled with for millennia. It may seem ridiculous that an athlete or entertainer earning millions of dollars per year would ever go bankrupt, but this happens on a regular basis. Kim Basinger, P.T. Barnum, Mark Twain, Oscar Wilde, Donald Trump, Tony Gwynn, Jerry Lee Lewis, MC Hammer, Henry Ford, Burt Reynolds, and Walt Disney are just a small sampling of celebrities and icons that have gone through financial hardship. (8)
Through countless appointments with our clients, we have learned firsthand that people are either hard-wired as “savers” or as “spenders.” Saving comes easily to some people, and others must work very hard at it.
Savers would never dream of spending more than they earn. They naturally pinch pennies and regularly set money aside. While saving money is a great thing, savers can also tend to be too restrictive. For example, one doctor we worked with drew a comfortable seven-figure salary, yet he still lectured his wife on buying brand-name pickles from a grocery store. Another doctor did not buy fruit if the price was above a certain dollar per pound. He was the same way with hamburger. His daughter actually grew up thinking she was poor because there were weeks when they “couldn’t afford” to buy hamburger. In reality, they had millions of dollars in the bank.
Although these are extreme cases, it is common to see the family or spouse of a saver stressed out because they rarely get to enjoy the fruits of the breadwinner’s hard work.
Spenders, on the other hand, are no strangers to instant gratification. If they see something they want, they find a way to justify purchasing it. Prioritizing how money is spent (or not spent) rarely enters their thoughts. This can lead to financial disaster as savings and investments cash floW: kEEP $3,000,000 anD rEgain PEacE of minD – 13 – fail to accumulate and debt piles up instead. One young client came to us after purchasing a $950,000 home, a new luxury car, and a speedboat, only to realize he did not have enough extra cash flow to pay for his daughter’s school tuition. He was devastated by this, and realized he needed help managing his family’s financial affairs.
Fortunately, it seems that most families consist of one saver and one spender, which results in a more balanced financial life. However, exceptions are possible, with the biggest financial challenges often occurring for those couples with two spenders and no savers. The problem: Most spenders do not realize how little control they truly have over their spending. This usually makes for financial setback unless special checks and balances are put in place to protect the family. The good news is that by introducing good financial habits into the mix, they can usually get their overspending in check.
Developing Sound Financial Habits
Whether a saver or a spender, it is important to develop sound financial habits in order to better manage your monthly cash flow. We believe that no matter the financial phase, every physician should practice these four financial habits.
Financial Habits for Cash Flow Management:
- Habit #1: Maintain Emergency / Opportunity Reserves
- Habit #2: Categorize Your Life—Build a Budget
- Habit #3: Give to Causes Greater than Yourself
- Habit #4: Begin on the Final Page
Habit #1: Maintain Emergency / Opportunity Reserves
Life changes quickly, and the unexpected frequently occurs. Financial planning textbooks often suggest that you should set aside cash equal to six months worth of your income. (9) The reality is that many doctors and dentists do not keep that much in reserves. Rather, most of our physicians maintain about two to three months worth of monthly living expenses in a checking account or money market fund. For additional emergency reserves, they rely on a home equity line of credit, four-day access to their investment funds, and/or an unsecured line of credit.
The first key to a long-term successful financial life is access to adequate resources for emergencies or opportunities.
Habit #2: Categorize Your Life–Build a Budget
In addition to building adequate emergency reserves, we also recommend doctors separate their financial responsibilities into five main categories in order to help build a basic budget for their financial lives:
- Debt Reduction
Each category should be assigned a percentage of the total income. Provided that the percentages are properly balanced, this can make life much easier.
Doctors and dentists often wonder how they should go about establishing the above percentages. Every situation is different, but we offer the reader some basic guidelines in Habit #3 and Habit #4.
Habit #3: Give to Causes Greater than Yourself
At first we were surprised when our clients asked us about how much money they should be giving away. We had not expected to be involved in such a personal decision. It turns out that many physicians have questions about giving money to charity or tithing to their place of worship. This is exciting. It tells us that we are involved with a generous portion of society that believes financial success is not something to be taken for granted.
On the surface this issue is personal, but we believe the question arises as many people share a worldview that this life is about more than just ourselves.
As authors, we personally approach life from a Christian worldview, and this influences the way we manage the financial resources that have been entrusted to each of us. The world’s major religious faiths share three fundamental financial principles as it relates to giving, that are paramount to this discussion:
- Those of us who have resources also have a responsibility to help provide for those who do not.
- Giving to those less fortunate should involve a measure of personal sacrifice or we are not doing our part.
- Giving should be done at all phases of life. (We are fooling ourselves by thinking that we will give later when we have more resources.)
In his highly recommended book, The Treasure Principle, Randy Alcorn sums up these teachings with the great reminder, “You can’t take it with you when you go.” (10)
Money is a temporary tool for a temporary life. At the end of the day, we know of no man or woman who hopes his or her gravestone says, “Here lies a really rich doctor.” Instead, our hope is that we can help our clients achieve enough peace of mind regarding their own financial lives that it frees them to devote more of their time, effort, and energy to building a meaningful legacy.
If your primary question is, “How much should we give?” perhaps a paradigm shift in your thinking is appropriate. A better question might be, “How much can we give?” In their book Why Good Things Happen to Good People, Stephen Post, Ph.D. and Jill Neimark, document consistent studies that show those who are generous with their time and wealth are happier, healthier, less stressed, live longer, and feel more spiritually fulfilled. (11) Therefore, when it comes to cash flow management, we believe one of the most important habits to establish early on is a consistent method of giving away a portion of your resources to passions greater than yourself.
Dr. Ryan Vickery, a successful anesthesiologist, summed up these principles well for us in a personal interview. He found that perspective is vital in understanding why it makes so much sense to give away time or resources,
“For years,” he said, “I focused the actions of each day on the short term. It was as if the only important part of life was the next 3-5 days.”
He then added, “When we actually sat down on different occasions to give it some real thought, it connected for my wife, Becky, and me that life is really about something much bigger than what we were previously focused on.” (12)
When we look at life in terms of the “big picture,” as shown above, whether we believe in eternity or not, everything else will change. If we focus on the long-term, the way we interact with our spouses will change, the way we parent our children will change, and most important, as it relates to this book, the way we manage our financial lives must change.
Dr. Ben Carson, director of the pediatric neurosurgery division at Johns Hopkins says the following in his book, The Big Picture: Getting Perspective on What’s Really Important in Life: (13)
The reason we need to consider our priorities carefully–and the principles on which we base them–is that they impact every important choice we make in life. Those choices further determine both the ultimate direction of our lives and the unique set of opportunities that will come our way.
How is a doctor to make this long-term perspective on priorities practical in his or her own financial life? For those physicians who have not yet established their own philosophy for their family’s charitable giving, we offer a suggestion. Our approach is simple. Begin giving away a set percentage of the after-tax paycheck you bring home. To begin, the percentage is irrelevant unless your religious beliefs dictate otherwise. Just do something to get started. Make it a goal as a family to increase this percentage whenever possible, but at least every year. Even if you only increase by 0.5% per year, you will still be giving more and more, and likely finding your efforts increasingly more fulfilling.
Note: It turns out that we benefit most when we connect face to face with those whom we support, and we are most fulfilled about giving when we are on a first-name basis with those who receive our gifts. (14) This is a topic that will be explored further in our upcoming book on building a lasting legacy.
Giving becomes easier once it develops into a regular habit. We have yet to meet a physician who started giving and later regretted it. You need not take our word for this, instead consider the words of Dr. Will Mayo:
By 1894 my brother and I had paid for our homes. Our clinic was on its feet. Patients kept coming. Our theories seemed to be working out. The mortality rate among our cases was satisfyingly low. Money began to pile up. To us it seemed to be more money than any two men had any right to have. We talked it over a lot, that year of 1894 we came to a decision. That year we put aside half of our income. We couldn’t touch a cent of that half for ourselves…
From 1894 onward we have never used more than half of our incomes on ourselves and our families… My brother and I have both put ourselves on salaries now. The salaries are far less than half our incomes. We live within them…
My interest and my brother’s interest is to train men for the service of humanity. What can I do with one pair of hands? But, if I can train 50 or 500 pairs of hands, I have helped hand on the torch.” (15)
Habit #4: Begin on the Final Page
Simply building emergency reserves, categorizing your life, and giving to great causes will not automatically lead to financial success. The remaining key is to spend the right amount less than you earn. In order to determine the right amount to properly set aside for the future, you must first “begin on the final page.” The point is simple: if you don’t know where you’re headed; there is no good way to get there. Instead, when you know what you want to achieve, you can work backward to determine the amount that you need to save today in order to make it happen.
Delayed gratification is a difficult concept for many Americans to grasp. We live in a society that thrives on getting whatever we want whenever we want it. Fortunately, doctors have a much better understanding of delayed gratification than the general public, or they never would have spent so much time in training. No different than setting your sights on becoming a physician, it is crucial to set some reasonable objectives about what you want to achieve in the future as it relates to your financial life.
By beginning on the final page, and knowing what you want to accomplish tomorrow, it is possible to determine the sacrifice that must be made today.
Doctors and dentists are often pleasantly surprised when they find out that they can still enjoy a great lifestyle today, while at the same time providing for the future. In fact, families tell us it is comforting to know the appropriate amount they need to save, to set aside for the future. By knowing that, they also know how much they can spend and enjoy today.
It is always better to know sooner, rather than later, if your expectations are realistic. When it comes to money, almost everyone hates surprises.
Creating a Savings Target
We are often asked: “How much should we be saving for the future?” Because each family’s situation has so many different variables, there are no generic answers to this question. However, the following chart, from the Journal of Financial Planning, provides some general guidelines based on the most common situations we see for younger physicians. 3
Notice that achieving a comfortable retirement requires a far larger portion of your income to provide for retirement than the typical 10% you may have previously heard. Of course, the earlier you begin saving, the lower the percentage of income required to meet your goals. Note that this issue is a gigantic aspect of what makes your financial life so unique as a physician. If you had 40 years to save for retirement, your required savings rate might drop to as low as 8% of your income. Because physicians typically desire a much shorter time frame to reach financial independence, this dictates their savings rate must be greatly increased. (16)
The issue of where you save your money (what type of accounts, investments, etc. that you use) is also critical and is discussed in more detail in the Investment Management section, beginning on page 56. The lifestyle you desire in retirement is also paramount in making your decisions.
John became a partner with his orthopedic group, giving him an annual income increase of $200,000. It was important to him and his wife, Becca, to establish strong financial habits for their future. They wanted to know they were saving enough money to provide for their children’s education and their own retirement, but they also wanted to eliminate their debts, and make sure they were regularly donating to their favorite causes.
They established the following plan for each paycheck:
- The first 12% would be given away
- Another 18% would go toward saving and investing
- 60% would go for living expenses (including the minimum debt payment allowed)
- The remaining 10% would be applied as additional payments to eliminate their debt earlier than scheduled, and this 10% would be used to increase their savings percentage, once the debts had been fully eliminated.
The basic budget shown above was the catalyst that helped John and Becca feel comfortable spending their “living” money because they had already provided for everything else. For the first time ever, they felt like they could go on a great family vacation without feeling guilty about their large mortgage payment.
Having a plan and purpose for your income is fundamental to all other financial decisions. The first step is to spend some time dreaming about what you want the “final page” to look like.
- What type of retirement lifestyle do you genuinely want to enjoy?
- Is it important to you to be in a position to help your children attend college? Grad school? Does it matter if it is public or private education?
- Do you want to leave other money to your loved ones? If so, how much, and for what purposes?
- Are there causes that you find important enough that you would like to see them attached to the legacy you leave for your greatgrandchildren?
- Are there other dreams you have that would require financial resources? What are they?
- In order for you to feel like you have made exceptional progress in your financial life, what needs to happen over the next three years?
The next step is to prioritize the four opportunities for your money (mark 1–4 to designate your highest to lowest priority items, with taxes #5):
___Saving and Investing
Now that you have prioritized them, take your order of priority and move it below. Next, designate the percent of your after-tax income (net income) that you plan to send to each category.
Note: Most physicians do not have a great handle on what percentages are required for each of these items. Helping you properly determine these answers is a big part of a financial advisor’s value proposition.
Top Priority _________________________________
% Dedicated ______
Second Priority _______________________________
% Dedicated ______
Third Priority ________________________________
% Dedicated ______
Fourth Priority _______________________________
% Dedicated ______
Now that you have developed a plan for your income, implement it by taking the funds needed for giving, debt reduction, and saving and investment right off of the top of all income you earn. The best way to keep this money separate is to automatically deposit it into an account that does not commingle with your normal living expenses. All other dollars can be used for living expenses however you choose.
For further reading:
- The Richest Man Who Ever Lived, by Steven K. Scott
- The Medical Marriage, by Wayne and Mary Sotile
- The Treasure Principle, by Randy Alcorn
- Why Good Things Happen to Good People, Stephen Post, Ph.D. and Jill Neimark
- The Big Picture, Dr. Ben Carson