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The Bills Are Coming
As the calendar turns into January, many of you are starting to receive your credit card bills from the past few months of spending. It’s not pretty, and it can be kinda shocking as those dollars add up to a large bill for those consumable goods. There may be a few of your purchases that linger as savored holiday splurges, but by and large, most of those purchases are like Bob Dylan’s song “Blowin’ in the Wind”—here for a moment and then gone in an instant. One of the richest men in the history of the world said the same thing about the fleeting nature of goods and riches. Those dollars used to pay your credit card bills can feel like money that was simply burned—gone as the season ends.
Burning Your Money
Burning your money is a term used to describe the act of spending money on something that will not yield any return. The idea of burning your money is a metaphor for spending it on things that are not worth the cost. This can be done by buying expensive items, or by wasting money on frivolous and impulsive buys. Overall choosing to burn your income with a consumptive lifestyle is not sustainable, because it is rarely satisfied. More is needed as your spending escalates to match your growing expensive habits. Not only is this unsustainable but it will also undermine the growth of your savings and net worth. The average person spends $1,200 a year on coffee alone, and that number grows to $3000 annually if Starbucks is your preferred coffee source. Coffee is just one example of how people indulgently spend their money on things that they don’t need.
Regardless of your income level, you should be more mindful of your spending habits and make sure that you are not wasting money on things that you can live without.
Paycheck to Paycheck Living
Spending your money on things that don’t yield a return ultimately fuels a lifestyle that leads to paycheck-to-paycheck living. Although doctors do make a lot of money, this doesn’t mean that you are immune to paycheck-to-paycheck living like the other 64% of the American population. A recent report from the Lending Club found that roughly 45% of those making more than $100,000 say they live paycheck to paycheck; 47% of those making between $150,000 and $ 200,000 a year; and 28% of those making over $200,000. A similar survey revealed that 30% of those earning $250,000 or more also live paycheck to paycheck.
This is evidence that those who earn a high income often elevate their consumptive lifestyle in parallel to their earnings. Inflation has only made things worse as the cost of goods has risen dramatically in recent times.
Add to this the proclivity for doctors to live upper-middle-class lifestyles that are plagued with a “keeping up with Jone’s mentality”, and you have the recipe for your paycheck to not keep your bank account filled as it should for someone with your high income.
So how do those who earn a lot of money break the cycle of paycheck-to-paycheck living? It begins with a determination to spend less and save more.
In order for this to happen you have to be willing to re-examine your spending habits and cut lingering debt. This, in turn, requires some intentional effort and self-discipline. Certainly, a financial planner can help you organize things, but at the end of the day, you and your family are solely responsible for your spending habits and decisions.
Easy To Be Undisciplined
Frankly, it’s easy for high-income earners like yourself to skip the needed discipline of a budget, spending plan, or retrospective self-evaluation. That is because you can expect your large paycheck to cover most of your consumptive habits, and in most instances, it will.
And this is the exact reason that it can be hard to muster the motivation to really make behavioral financial changes in your life. Because in all honesty, the more money you spend now will only push out the timeline that it takes for you to reach financial independence. Given the fact that the majority of doctors don’t track their net worth, nor fully know the projected dollars they will need to retire, lengthening this Financial Independence timeline is vague anyway. The following is a nice graphic illustrating the progressive financial stages for all of us.
As an example of a high-income earner not knowing where they were on this continuum, I was just speaking to a physician and his spouse about some tax and business strategies. They had real estate assets of nearly 10 million dollars, make over $600,000 a year in income, and yet were still a little unclear about their exact net worth. Additionally, they had no idea how many $$ they needed to reach financial independence ( you have to know your annual spending and preferred lifestyle to know this number).
Frankly, they were frugal people and lived relatively basic lifestyles, yet they had little awareness of the state of their finances. In their case, I didn’t have to coach them to cut back on their spending, instead, I was able to help them see that they could ease up on the earnings accelerator a bit—as we worked on a plan to help them reduce their taxes while letting their assets work for them. They had all the needed ingredients of active income, passive income, and modest spending, and then they just needed a little help with putting it all together with a bit of an emphasis on retained earnings.
Eventually
Most doctors know their high income they will eventually lead to a net worth number that allows them to no longer have to work (retire). It’s not a matter of if, but a matter of when. A generation ago, doctors planned to work 40 years or longer because of their love for medicine and the sustainability of the private practice. Thus there was the belief that a doctor would eventually reach financial independence.
Shortened Careers
But today’s burnout-ridden doctors who are trapped in the web of the corporatization of medicine are becoming increasingly aware that long careers are not sustainable. Rather their professional careers are being reduced to 20-30 years of work. With only 20-30 years of high-income earning, rather than 40 years, it is all the more important to be mindful about monitoring your net worth. The truth is that You are highly unlikely to work as long as the doctor who took care of you during your younger years. When I took over Dr Guild’s practice 25 years ago, he was passing the 40-year baton to me, those days are gone.
The only way I could sustain 25-30 years as an employed doctor was by changing to an employment lite contract and by adapting to the EHR burden by using 3 scribe nurses for my day-to-day work.
Beyond the length of time, you will work during your career, there are other factors that will influence whether your earnings will be burned, or used to create new sources of income for your household (businesses, retirement funds, taxable investments, and real estate just to name a few).
Debt and Lifestyle
The amount of money you have to save and build your income-producing assets will often depend on your educational debt and the affluent lifestyle that you choose to adopt. This includes the “doctor’s house”, fancy vacations, and luxury cars. Frankly, not many consumer purchases will be outside of your reach because nearly any item can be broken down into monthly payments that make it affordable within your large income. So if you want an item, it’s just a matter of calculating the necessary amount to allow it to be covered by your regular monthly paycheck.
The truly good news is that, unlike most Americans, your large earnings will cover virtually any spending decision you make. This provides you with the enviable lifestyle power that is often associated with the wealthy. The bottom line is if you can’t buy it with cash, it is still within your reach through creative financing. That is because doctors are such a low risk to lenders, that they are more than happy to help you refinance and consolidate your debt/loans if needed. And this is the trap that is easy for you to repeatedly step into, and that is the “just finance it” mindset. It takes self-control to not accept the red carpet rolled out to you by everyone trying to sell you goods.
You Need A Plan
In the end, you will be able to spend less and save more if you have a system for tracking and managing the financial decisions of your home. I am convinced too many doctors falsely believe that if they max out their corporately supported retirement plan, and passively let the government take out their taxes, then the rest of their paycheck can be burned any way they want.
Spending Mindset
In other words, after you meet the obligations to pay yourself and then uncle Sam, then it’s like a board game with “funny money”. Once this mindset gets set in motion, it becomes increasingly difficult to change your or your family’s financial behaviors and truly spend less, or save more. Thus, when your finances do get tight, most doctors will look for ways to earn more money (work harder or longer at their job) or seek to add inside jobs. The extra income becomes the answer to the financial pressures rather than addressing the underlying financial behavioral problems.
This is the beauty of a spending plan, it keeps you in control of your dollars but simultaneously helps you make sure your earned dollars are just no frivolously spent, nor mindlessly consumed. You alone get to determine how it is saved, spent, and given.
In my next post, I will go into more detail about a spending plan for you.
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