Doctors need to save money too. We are very fortunate and worked very hard to be in the top 1% of income earners in the world. But this does not exclude us from this very basic fact and necessary habit for financial hygiene.
Unfortunately, while this may seem simple to some, it is a foreign concept to others. And for various reasons. I’ll be honest, until I began my financial education, I was clueless to the fact that we should actually save a portion of our income. Why? Chalk it up to a lack of financial education and a lack of financial mentors that I saw doing this. If I had any mentors actually doing this, they certainly weren’t talking openly about it.
And so I missed this important financial lesson.
The other main reasons doctors don’t save money well is a bit more pernicious. One is the pervasive taboo in medicine that doctors should not think about money lest they become bad doctors. I’ve already debunked that taboo here.
But the last reason is maybe the most common. I have doctors tell me they don’t need to save money simply because they make so much.
Whatever the reason, the bottom line is that doctors do need to save money. So, here are 9 reasons why along with 9 tips to help you do it!
9 reasons doctors need to save money too (plus 9 tips to help!)
1. High income doesn’t mean squat
Despite perception and depictions in media, high income does not make you wealthy. The simple math shows that even if you make $1 million in one year, if you spend $1 million in that same year, you are broke.
This seems impossible to do, but we see it all the time. Even in medicine. We see it happen to professional athletes and we judge them. But we overlook the doctors we see who are burned out, angry, and working past when they want to…simply because they need the pay check. This is bad for the doctors and bad for the patients who they are caring for (often in suboptimal fashion).
So, it’s really not what your income is, it’s what you do with your income that matters.
Tip #1: Calculate your net worth with any net worth calculator like I have. Doing so will show you that income isn’t included anywhere in your net worth calculation. Whether you make $1 million or $60,000, it’s what you save that matters. The formula to build wealth is to grow and invest the margin between what you make and what you spend. You can’t do that without saving…
2. Our careers can be shorter than we imagine
Traditional teaching of basic financial principles (even on my own blog!) encourages us to imagine our post-training clinical career as being 30 years.
While this might have been a previous average, I am pretty confident that the reality is that medical careers are much shorter now. No, I don’t have hard data. But I am basing this on an informal survey of all of the young doctors who I ask about their predicted career length. Pretty much no one expects to be working, or want to work in 30 years.
On top of this, there is risk of burnout, occupational injury, or just random injury like happened to Ian Cook of CarpeDiem MD, to shorten your career.
Tip #2: Bottom line? You need to save money earlier than you expect. Don’t look at your income and say that you will save more tomorrow. First, that is behaviorally unlikely. Second, tomorrow may never come.
3. Our lack of savings lets compound interest actively work against us
If you have bad debt – i.e. any debt that is not paying you to hold it – and you are not saving money and paying that bad debt off, compound interest is your enemy and not your friend.
It’s one thing to just not save and invest. When you do that, you are just passively ignoring and not using compound interest to your advantage. But with debt, compound interest is working against you. And it’s working against you hard, every second of every day.
The first step when you are in a hole is to stop digging. Then you can climb out and crawl then walk and finally run. You first need to save so you can pay off debt, turn compound interest into a friend, and then invest to reach financial freedom.
Tip #3: Create a debt pay down plan. Tabulate all of your bad debt, including credit card debt, mortgage debt for non-cash-flowing real estate, student debt, etc. List it from highest interest amount to lowest. Make all minimum payments and then start paying off the highest interest rate debt first. Then progress on down the list until it is gone. Your goal should be to become non-mortgage debt free in 5 years! Here’s my debt pay down plan…
4. Early savings matter the most
The more money you save, the more money you can invest. The more you invest earlier in your life/career, the greater than return on those investments.
This is simple math due to the nature and wonder of compound interest that any compound interest calculator like the one here will demonstrate.
If you don’t save, you can’t invest. If you don’t save early, your investments will lag behind. And you will need to depend on your doctor’s income for longer. Maybe even longer than you want to or can.
Tip #4: Create a savings rate of at least 20% of your gross income as early in your career as you can. If this seems too hard, start by creating a savings rate of 5% and then increase it by 5% every 1-2 months. It’s best if you started yesterday. But the next best day to start is today.
5. We are really bad at estimating our expenses
When doctors don’t save money, we basically get collect our pay check and then pay everyone else in our lives. We cover all the other expenses and then see what we have left over.
Unfortunately, humans in general and especially high income earners like doctors are really bad at estimating our expenses. Each month, we are shocked that there is not money leftover from our enormous income for us to save.
There are many reasons for this. The biggest of which may be the planning fallacy. We plan ahead and imagine that all of our spending will go just according to plan. We will resist the temptations of DoorDash and splurging on this or that. But like never goes that way. Unless we have an active plan, we passively let things slip. It’s human nature.
But people with more money are generally able to let more slip. Not good.
Tip #5: Budget. I know you hate it. That’s what everyone says when I tell them to budget. But it works. And it’s even really simple when you use my template. But budgeting is so important because it teaches us to pay ourselves first. Instead of our usual routine, we need to build a habit of setting aside money from ourselves with each paycheck. And then we can spend the rest. Not the other way around…
6. Inflation is ridiculous
Inflation is a constant. In that it is always present. The cost of goods and services increases over time. Concomitantly, the purchasing price of a dollar decreases over time. It’s why your grandparents talk about when hot dogs were a nickel. And why I’ve started complaining about the cost of a chicken wings (I’m getting old…)
The long term average annual inflation is about 3%. But recently, inflation has been hovering around 9%. That’s massive!
There are a number of factors that go in to “controlling” inflation. If not can actually be controlled. Regardless, these factors are generally out of our hands beyond voting in elections. Further, no one knows how inflation will fare in the future. We hope it decreases, but my crystal ball is as cloudy as yours.
Tip #6: So, what is the best way to beat inflation? Make your money grow higher, faster than inflation. How do you do that? Investing. But you can’t invest money until you save it first. And the faster inflation rises, the more of your money it behooves you to save and invest. Because your retirement account alone won’t keep up…
7. Saving makes us spend better
The consumer purchase cycle goes something like this:
- Buy something
- Get a big hit of dopamine
- The dopamine quickly fades and we lose interest in the previous purchase
- We seek the next dopamine hit via another purchase
- And the cycle repeats
This goes for every consumer. But high income earners have more money to possibly spend – even if unwisely. And bigger price tags provide bigger dopamine hits. Bigger dopamine hits lead to a bigger withdrawal and urgency for the next hit. Add in delayed gratification after training and we are really in trouble.
So, what are we to do? Well, actually saving can help.
Tip #7: Science shows that when we wait before making purchases, we enjoy them more. The more we wait and bring our purchasing decisions into the intentional System 2 part of our brain – in contrast to the reactive System 1 part of our brain, the more intentional we are with our spending. And the more we break the above consumer purchase cycle. Saving as a habit makes us better spenders. And doctors are really bad spenders…
8. What we make is less in our control than we like
Let’s revisit something that I said in Tip #1:
- The formula to build wealth is to grow and invest the margin between what you make and what you spend.
When this first clicked to me, it just absolutely makes sense. It’s beautiful in its simplicity. At least to me.
Let’s break this equation down to its two most important factors: what you make and what you spend. These two items will ultimately determine your margin, which determines your amount to invest, which determines your nest egg. And ultimately that determine your ability to reach financial freedom.
And let’s start with “what you make.” Well, what you make is under your control. I used to think that it wasn’t. But this was a scarcity mindset. I now have an abundance mindset and have been able to increase “what I make” through contract negotiation, real estate investing, and physician side gigs like consulting, surveys, and the more here.
But even the most hardcore believer in the abundancy mindset must agree that there are some immediate limitations on what you can make. It takes time to grow.
However, “what you spend” is always, at every moment – even right now – 100% in your control. Saving money, even for doctors, is the most immediate and clear path to financial freedom that exists.
Tip #8: Let me repeat that because I think it is so important…Saving money, even for doctors, is the most immediate and clear path to financial freedom that exists. That’s the tip.
9. Financial freedom is worth it
What is the end goal of this? It’s financial freedom of course!
It’s the ability to live on our own terms. The ability to work because we want to, not because we have to. And, in my humble opinion, it would allow doctors to begin to change healthcare for the better in incredible ways!
However, we each need to have our own special and powerful “why” for reaching financial freedom. And everyone’s will be different. And that’s ok, because that is the point. For some doctors, their why will be to leave clinical medicine. For others, like me, it involves being able to practice on my own terms. One is not right or wrong or better than the other.
But the bottom line is financial freedom is worth it.
So, while I understand that saving can be hard and at times requires sacrifice (although that may be a strong word for what we do with our high income), the juice at the end is well worth the squeeze.
Tip #9: Spend some time alone or with a partner thinking about why you want financial freedom and what you would or could do with it. Then write it down and refer back to it when you are having a tough time or doubt your plan. This is my why.
But isn’t something missing?!
Yes, doctors need to save money. I hope that much is clear now. But that is not it!
You still need to invest and grow that money. Get your money making money. And while there is no one right way to do this either, some are better than others. Here’s some resources to help!
- How Much Is Enough Retirement Savings?
- My Written Financial Plan Update
- Stress Free Stock Market Investing Is Easier Than It Seems!
- 5 Steps for Doctors to Start Investing in Real Estate
- The 3 Most Tempting Current Investments to Avoid
What do you think? Do doctors need to save money? How much are you saving? How can you help others who are struggling? Let me know in the comments below!