As I write this post, I am set to begin my attending job tomorrow.
Obviously, I can’t help but reflect on the long path that I took to this point.
I also have been reflecting on the shorter financial journey that I have taken over the past few months to become the Prudent Plastic Surgeon.
Honestly, just a few months ago, the thought of becoming an attending terrified me. Not because I felt unprepared for the job, in fact I was anxious to get going on my own (Shout out to NYU plastic surgery for getting me to that point!).
I was terrified. After being in the shelter of residency and fellowship for 7 years, I now had to emerge. It was time to face the music of my massive student debt on top of living up to the lifestyle standard of a “rich plastic surgeon.”
I felt this way because I had no financial education and no route to financial well-being.
Then, it all changed as I have shared with you…I began my financial education and am now on a well-planned out path towards financial and personal well-being.
Just How Deep of a Financial Hole (Crater?) Did I Dig?
I would characterize my pre-financial education financial strategy as sticking my head in the sand and hoping for the best.
I do not recommend it.
Combine that strategy with student loans from college and medical school, 7 years of training, living in a city with one of the highest costs of living, and a lack of saving, it’s safe to say that I dug myself quite a hole.
When I first calculated my net worth using on online calculator, I found out it was -$412,022.
I told you it was quite a hole!
I was just glad that the lowest net worth that you could put for a mortgage application was $0.
What Is A Net Worth Anyway?
Before I filled out the calculator and realized that my 7 month old son had a higher net worth than me, I honestly didn’t even know the definition of net worth. So, don’t be embarrassed if you don’t know it either.
Net worth is a simple equation.
Net worth is what you own minus what you owe. It’s your assets (things that put money in your pocket) minus your liabilities (things that take money out of your pocket).
Wait, are kids liabilities? Don’t answer that question!
The biggest mind explosion that happened when I really looked at what goes into calculating your net worth is that your annual salary/income is nowhere on there!
I thought that’s how you get wealthy, right? Making a lot of money. That’s what most people think. But, in reality, a high income may make you rich, but a high savings rate and high conversion of income to assets is what makes you wealthy.
Once you know the rules of net worth, you can finally start playing the game. I was going to be a high-income earner. But now I knew that it was going to take more than that to become wealthy. My mindset had to change.
Now I knew the rules, so I finally started playing the game.
My New Net Worth
My new net worth is still quite negative.
But it’s better than it was. And the reason it’s better is because I know the rules of engagement for wealth-building.
I learned these rules of engagement about 1 month before making some very important decisions. These decisions would affect my financial situation for years to come. I was about to buy a house, two cars, and begin my new lifestyle in a new city and at a new job.
I now could make these decisions with net worth in mind.
My new net worth is -$405,800.
That’s a gain in net worth of $6,222.
Climbing Out of the Hole (Crater?) One Step at a Time
Now I know that $6,222 is not a huge amount.
But I am very proud of increasing my net worth by this amount before my wife and I made our first paychecks. In fact, we increased our net worth by this much in a period where neither of us worked for 1-3 months as we transitioned.
Had I not known the rules of playing the net worth game, I promise it would be even more hilariously negative at this point.
Every step needs to be a step in the right direction, no matter how small.
How Did I Do It?
I told you that I had some big life decisions to make at the point that I learned about net worth. The biggest of these was finding a house.
Smart House Smart
My wife and I were in the middle of house hunting. Mind you, we have two children under 2 so we couldn’t house hackor get a small apartment. But we wanted to make sure we didn’t become house poor or lock into a mortgage that would limit our ability to grow net worth.
We set a budget that was much less than 2x our annual income (a good rule of thumb) and kept our house debt to income ratio much less than the recommended 28%. We played with a mortgage calculator to see how different prices and rates affected our payments.
Then, we got to work finding a house that worked for our family and financial situation.
How to increase your net worth while buying a home
Ultimately, thanks to our patience and homework, we bought a great home below its market value, which has since appreciated in value in just a short time.
We bought it for 0% down using a physician’s loan. The difference between our mortgage value and the home’s original market value plus market appreciation since buying is equal to an increase in net worth.
Two additional things about our home purchase also increased our net worth. First, we negotiated to have all furniture included in the purchase of the house. The total value of this luxury furniture now all goes in the asset column.
Second, we bought a home well enough below are budget that we are now in the process of buying a second investment property. This property will offer us cash flow, equity build up, and tax benefits. This is not on our books yet but will come soon enough.
Last, we bought a home that we planned to be in for at least 10 years. Like the stock market, the overall housing market is pretty safe to increase in value over the long term.
Disclaimer: I do NOT recommend this approach for most people. My universal advice is to rent until you are at a new job for a year or so to make sure it is a good fit. Then you are not stuck with two mortgages when trying to move.
If we couldn’t find a home like this one, our plan was to rent a house until we found a long-term option. I was also moving to my hometown to a job that I had vetted for a long time. That’s why I felt comfortable to do this.
Don’t Go into Debt for Your Car
We were moving from NYC where we didn’t have any cars and now would need two cars. The thing about cars is that I don’t really care about them. I know that a lot of people do, but they just don’t do it for me. But I originally had still budgeted $500/month for a car lease. Why in the world would I spend $6000 annually for something that I don’t really care about????
So, I changed my mindset and bought an excellent used car for $2000 which was well below market value. The difference between the current market value of the car and what I paid for it adds to our net worth. And now I can save and invest that $500/month.
In general, I am not a fan of leasing since you basically are just subsidizing the major depreciation that a car takes during its first 3 years for the dealer. This being said, we needed a larger car for our kids and did lease a reasonable one for less than $500/month for my wife.
We could have bought the car on a loan, but I am a firm believer that unless you can pay off your car in a year, you shouldn’t buy it. We will buy our next car in cash after the lease is up. It’s even written in our financial plan.
I Hit Up the Front Door Roth While I Could
I also immediately contributed what I could (about $2000) to a new Roth IRA that I opened with Vanguard.
The CARES Act moved tax day back to July 15 which meant that I could still contribute to a 2019 Roth IRA before my 2020 income increased and phased me out of the tax benefits. I will still be contributing to Roth accounts through the backdoor in the future. However, this was a simple and clear-cut option to improve my net worth in the present.
Notice that this meant I also bought into the overall stock market during the Coronabear market when most people were pulling out of the market. Stocks were on sale and so I bought them.
So far, I have made about $1000 passively from this decision. It will go up and down innumerous times from here on out. But I only invested money I knew I wouldn’t need for at least 20 years so I don’t care about the short term anyway.
Largely, those were the main factors that allowed me to increase my net worth during a time when I wasn’t making any money and I actually had to spend money on big purchases.
It’s a small step in the right direction. But I have a long way to go (as in about 400,000 steps just to get back to 0).
Looking at my net worth balance sheet, the biggest items in the “what I owe” column are my mortgage and my student debt. The mortgage I don’t mind because the value of my home is greater than the mortgage so that comes out net positive in terms of net worth.
Debt Offers the Best Net Worth Yield
My student debt though is a HUGE drag on my net worth.
Paying that off becomes the big focus. Every $1 I use to pay off my student debt immediately increases my net worth by $1.
That’s the best return you will ever see.
Better than index funds and better than investment real estate, which are the two main wealth building vehicles that I will be using. So, my wife and I have budgeted a large percentage of our income to paying off this debt.
Buy Assets, Not Liabilities
After clearing debt, the next best way to increase my, or anyone’s, net worth is to put more assets in the asset column and minimize liabilities in the liabilities column. Seems easy enough but most people don’t do it.
Anything that passively puts money in your pocket (index funds, properly vetted real estate opportunities, etc.) is an asset. Anything that takes money out of your pocket (depreciating assets like brand new automobiles, etc.) are liabilities.
Think about that the next time you are about to make a big purchase.
Calculate Your Net Worth A Lot
Initially, we planned to calculate our net worth annually to track our progress. However, when it came time to write our financial plan, we changed our mind and decided to calculate our net worth every 2 months.
This will keep us accountable and give us instant feedback regarding the financial decisions we are making.
Since we now know the rules of the game, we also know that we need to keep score.
What do you think? Do you regularly calculate your net worth? How often? Have you ever bought something only to discover it’s actually a liability and not an asset? Did your net worth increase or decrease between graduation and starting your attending job? Leave a comment below!
4 thoughts on “How I Increased My Net Worth Between Graduation and Starting My Attending Job”
Hey Dr. Frey, really enjoying the blog! I’m currently a junior plastic surgery resident in Canada and while were in different countries, this blog hits home. I had a quick question. I’m currently paying down my debt aggressively (>35k in first year residency) with roughly 175k left. Because interest rates are so low in Canada (paying prime -0.25%), would you recommend I switch my funds to low costs ETS’s like Vanguard?
Thanks Connor, glad you’re enjoying the blog!
Also, big congrats on how well you’re doing with your debt pay down. Very impressive and glad you’re starting early. Way better than me.
It’s always a big question if you should pay down debt with low interest rates vs. invest that money in something with a higher rate. It all really comes down to your personal priorities. Some people really hate debt and will feel better paying it all off. Others are able to take all emotions out of it and seek the higher return with investments. There is no wrong answer, both ways will get you towards financial independence.
I sort of take the half-way approach. I’m saving 41% of my income. 1/3 goes to retirement accounts, 1/3 to real estate, and 1/3 to debt. Write out a plan and stick with it regardless of interest rates or the things out of your control.