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3 Easy Ways Doctors Can Convert Earned Income into Passive Income

The name of the game in wealth building, in reaching financial freedom, and establishing financial well-being is learning to convert earned income into passive income.

Recognizing this simple fact changed my entire outlook on personal finance.

convert earned income

Suddenly, attaining financial freedom didn’t seem completely unreachable, as it had to me in the past. I understood the path. Mind you, at the time, I was absolutely not on that path. But I finally knew it existed. And that all I had to do was adjust my course to get on it.

Once I got on the path, my financial well-being shot through the roof. Even though, at the time, I was still at the end of my training and hadn’t made a cent more money. I had a plan to reach financial freedom and all I had to do was follow it.

Knowing that gave me so much peace, eased my burnout, and allowed me to focus on what I loved about medicine, making me a better doctor.

Adjusting your mindset around earned income

How you make the money

Before you can convert earned income to passive income, it’s important to address our mindset around earned income.

For me, prior to my financial education, and for so many others, earned income is really the only income that we recognize. We work. We get paid. Simple as that.

But we need to realize that we can also separate that relationship between work and income. I’ve said many times that passive income is a bit of a misnomer. It’s really leveraged income that we are after. Our doctor work is 1:1, making it not leveraged at all. We don’t work, we don’t make money. But leveraged income has a work:income ratio less than 1.

So that’s the first thing we need to appreciate.

How you spend the money

Way too many of us think that earned income exists just to spend it. Before I got on my path to financial freedom, this was just what I assumed. Why? Looking back I have no idea. But it’s just sort of the way society makes us think about money.

We get money, we spend all of it on goods and services.

The problems with this are many, but 2 important ones are:

  • This leaves nothing left over for saving/investing and
  • We are horrible at knowing what purchases will make us happy and often they do not, in fact, make us happy long-term

This simple realization for me – that money didn’t have to be just spent – opened up a whole new world.

Here is a full guide to learning and practicing intentional spending to combat the over consumerism fostered in our world…

How you view the money

The last big mindset shift that I had in relation to earned income is this: it is really seed money.

Growing that seed is how you convert earned income into passive income.

So that’s how I view much of my earned income. There’s the earned income I spend on my house, food, kids, clothes, etc. But there is also a huge chunk of my earned income that is seed money to grow my financial freedom.

You can get an in depth break down of where every $1 of my earned income goes in this post.

Simply changing your perspective on how you view it can make such a huge difference.

So, with all of this in mind, let’s talk about the top 3 ways for doctors to convert their earned income into passive income…

3 easy ways doctors can convert earned income into passive income

1. Index funds

This is hands-down the easiest way to get in the game and start making passive income.

Remember, index funds are mutual funds – basically baskets of stocks – that represent a broad area of most or all of the stock market. That makes them much safer than investing in individual stocks over the long term. The overall stock market has always gone up over the long term. Meanwhile, 80% of managers who try to stock pick and time the market in a given year fail to beat the market average.

So, if you are looking to start converting your active income into passive income, an amazing way to start is to set aside some savings each month and just put them into some index funds.

These index funds will appreciate and, sometimes, give you dividends. All of this is passive or leveraged income that builds your wealth.

The question then becomes which index funds to buy and what accounts to buy them in. These questions respectively are about asset allocation and asset location.

A guide to asset allocation can be found here and one about asset location can be found here. But in general, you will want to use tax advantaged accounts first before a taxable investing account.

2. Real Estate

Real estate is such a fantastic ways for doctors to convert earned income into passive income.

I generally get some resistance to this suggestion when I make it to other physicians. But there are so many ways to invest in real estate. And they all are great. You can tailor where along the passive-active spectrum you want to be with real estate. The important thing is just to learn about it, decide how you want to invest, and then do it.

From passive to active, options include:

  • REITs
    • Real Estate Investment Trusts are basically investing in a mutual fund of real estate investments. These are available in nearly every brokerage. Real estate doesn’t correlate with stocks/bonds so this is a good, passive way to diversify. No traditional tax benefits with this type of REI though.
  • Crowdfunding
    • This type of investing is basically where a lot of people pool together money to buy properties. A good example of a company specializing in this is CrowdStreet. The buy-in is usually much lower than with syndications or funds but so is the return, in general.
  • Private Funds
    • Funds are investments made in a company or group that specializes in real estate investments. They may specialize in different types of REI such as fix and flip vs. buy and hold. You are giving them your money and trusting they will get returns on your money that will be shared with you. There is no guarantee however. Buy-ins for these funds are usually high but CityVest offers the ability to access these funds with a lower buy-in.
  • Syndications
    • Syndications are real estate deals involving a smaller number of investors buying usually single properties. Buy-ins are usually bigger but so are the potential returns. Here is more info on syndications
  • Direct investing
    • This is my preferred kind of real estate investing. Sure, it’s more active in the beginning but offers huge returns and advantages when done right. Here’s my free Physician’s Guide to Real Estate Investing for more information. You can also see how my first investment property increased my net worth in my one-year review.

3. Your practice

Too many physicians ignore the potential of their practice to generate passive income. But we shouldn’t. There are a bunch of ways to do this:

  • Optimize your practice by investing to reduce expenses or increase reimbursement/income
  • Expand your practice to include more doctors or physician extender awhile reducing your role
  • Create secondary businesses within your practice such as a medispa, skin care line, physical therapy office, etc.
  • Invest in an office building or ambulatory surgery center

Of course, these options are largely available to those in private practice.

So what about employed doctors, like me?

There are still ways to optimize your practice and make things more passive as an employed physician:

  • Negotiate your contract aggressively maximizing your time on what you value and minimizing time on what you don’t
  • Negotiate for administrative or physician extender help
  • Lower your FTE so that you can open a private practice in which you incorporate aspects of financial freedom

If you are employed like me, make sure to check out this in-depth guide to optimizing your practice!

Bonus: Education

This really should be the first thing on the list. But it’s not as tangible so I saved it as a bonus.

Your education is the #1 thing that will help you convert earned income into passive income. You can’t do what you don’t know.

And as physicians, we get an amazing education. But it is hyper focused and only gets more focused as we move along. In most cases, none of our education includes anything about personal finance. So we ignore it, get intimidated by it, and make mistakes. Trust me, I know.

However, personal finance is luckily not as intimidating, scary, and tough as we think it is. There are simple guiding principles that we can follow and habits that we can build to get on the right path to financial freedom.

Do this and start learning the basics of financial well-being. Before long, you will be doing things you never imagined you could and taking massive action to build your wealth like I have!

Related Post:
Net Worth Update: From -$400K to +$400K in 14 Months


There are even more ways to create additional streams of passive or leveraged income using your earned income as seed money. This is how I created 5 in my first year as an attending surgeon. You can also see how much I generated in passive income after just 1 year here.

If you are interested in passive income, check out these side gigs to create passive money for physicians!

What do you think? How do you view your earned income? Do you convert earned income to passive income? How? Let me know in the comments below!

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    Jordan Frey MD, a plastic surgeon in Buffalo, NY, is one of the fastest-growing physician finance bloggers in the world. See how he went from financially clueless to increasing his net worth by $1M in 1 year and how you can do the same! Feel free to send Jordan a message at [email protected].

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