From 2014 until 2018 I have been able to increase my net worth rom $40k to $800k on a Family Medicine doctor’s salary. This included paying off $110k of student loan debt in order to achieve this great wealth.
I didn’t stash $190k a year into a savings account – most yeas my take-home income wasn’t even $150k. Instead, My net worth has grown because I budgeted, paid down debt, saved, invested wisely, and controlled risk.
For the healthcare professional who wants to retire early with great wealth or achieve early financial independence, they would probably do well following these 6 steps:
- paying down debt
- controlling risk
- diversifying income streams
My conversations with doctors often follow a very predictable pattern. We talk about budgeting and they say that they don’t have a budget but follow one in their head.
The problem with the one in the head is that it can’t keep track of that $1k here or the $3k there. It’s very easy to let $50k of great wealth slip through our hands because we are relying on the cerebral budget.
You won’t stick to the budget you draw up – that’s the point of YNAB. The designers understand that you will never stick to a budget. But its genius lies in how it allows you to cover overspending in a particular category.
Budgeting is important if you have a specific goal in mind. My goal was to be financially independent by age 41 – I hit my goal 2 years earlier. I was aiming for a $500k net worth but I ended up with $800k.
I still watch the budgeting videos, I still take the budgeting classes, I still engage in the budgeting forums. Budgeting through YNAB is how I learned about personal finances and it’s how I was able to escape the rat race of medicine.
2. Paying Down Debt
Once you have a solid budget, you can come up with a debt payoff strategy. Choose one that works for you.
1) Decide which debts you want to pay off and which you don’t care about. 2) Decide the order in which you’ll attack each debt. 3) Decide how much you want to send towards your debt each month and plug that into your budget.
Being debt-free isn’t just about saving on the interest payments. When you become debt-free that’s one less financial obligation that can pressure you to stay at an unpleasant job. It’s one less thing to have to keep track of and worry about.
When I pay off my 3% or 6% loan then that’s a 3% or 6% return on my money. But it’s much more than that which is tough to convey in a bland blog post.
The money you earn is after-tax money – it has already lost some value due to taxes. Your $100/hour income became $70/hour which you used to pay down your 3% student loans. And since you’re a medical professional, you’re paying back your debt with weaker dollars.
I can’t build great wealth without saving and investing my money and as long as I have less money to play with. It’s incredible to see how fast our net worth grows once debt is gone.
We need to save our money – however obvious that sounds, it’s overlooked by many medical professionals.
Buying a house and taking on a mortgage isn’t saving money. Renovating your bathroom and upgrading your kitchen counters aren’t considered saving money no matter what realty websites tell you.
Financing a $50k car instead of a $75k car isn’t saving money, that would still be considered spending money.
Saving money is siphoning some off of your income and using it to increase your net worth. It’s money that you won’t touch. It’s money that adds to your wealth, increasing your assets, not your liabilities.
I don’t see anything wrong with saving without traditional investing. Some medical professionals don’t trust Wall Street and don’t want the headache of a real estate portfolio.
But you’re always investing, one way or another. When you save your money in cash and put it in a ziplock bag in the back of the freezer, you have decided to invest in the US currency which has an average annual rate of return of -3%.
When you decide to keep your money in a savings account then you have decided to invest in a bank account which will return you about +0.5% on your money.
It’s important to remember that you’ll always have to battle inflation. Even when there is supposed zero inflation, businesses will raise their prices month after month and year after year. That’s the kind of economy we live in.
Just remember that if you’re earning less than +2.85% on your money then you are 100% losing money.
Why? Because the safest, most secure way for you to invest your money is the US Government Treasury Bonds which offers you +2.85% annual return as of this writing (1/2018) for a 30 year treasury bond.
Even if after reading my spiel on investment returns you decide to save your money in low-yield savings accounts, the very least you should do is invest in yourself – invest in your future income potential and focus on diversifying income streams.
5. Controlling Risk
Risk is such an interesting topic and it can be applied to so many things we do. It’s important to control risk in order to achieve the desired outcome with the least resistance possible.
When I went per diem with my old medical group I didn’t account for risk of being a per diem physician and that caught up with me in a terrible way.
We can control risk by having the proper insurances (life, health, auto, real estate) and by modifying our actions. A competent financial adviser is crucial in helping us identify our own unique risks.
One way to control risk is to have a healthy emergency fund. I have learned my lesson and have been building up my EF.
Another way to control risk is by diversifying income streams and diversifying our investment portfolio.
6. Diversifying Income Streams
There are many benefits to diversifying income streams, one of which is decreasing risk as I already mentioned.
Another is the ability to earn a higher income. Lemme ‘splain. When I have 3 gigs from which I can earn money then I can choose which one I want to dedicate hours to any given day.
Currently I earn some money from Teladoc, DoD, and JA as my readers know. When one of these platforms is slow or inefficient then I can switch to the other. When one is offering bonuses for seeing extra patients then I can choose that one instead.
Diversifying income streams also helps with taxes. If one company wants to offer me a 1099 instead of a W2 then I will do more work for them since I can manipulate taxes better as an independent contractor as opposed to an inefficient, unbenefited employee.
My emphasis is for healthcare professionals to earn some income outside of medicine. To me that’s the ultimate diversification. Hopefully you will pursue something that you are passionate about while decreasing your risk exposure in medicine.
$40k to $800k in 4 Years
If I had to guess how much of this $800k net worth wealth came from my earnings and how much from investment returns, I would guess it’s 60% income and 40% investment returns.
4 years isn’t a very long time for a healthcare professional and it’s an even shorter time for investment returns to compound. Imagine what another decade will achieve in increasing my net worth.
I spent 2 of these years paying down debt. That’s 2 years when my income wasn’t able to earn a sexy return because it was sequestered by my debt.
Is $800k enough? I’m told by many that it’s not. However, it’s enough for me. You’ll have to decide for yourself how much is enough. But don’t forget that your invested money will keep growing.
Furthermore, these 4 years were some of the most inefficient money years of my life. I didn’t know how to invest, I didn’t know how to budget, I didn’t value my free time, and I didn’t know how to mitigate my risk.
I hope that the curious healthcare professional will learn from what I have written and use my mistakes to avoid some of their own and achieve their own great wealth in the process.