It’s helpful to know where you want to end up with your finances – do you want to be rich or are you content affording your lifestyle. Rich by societal standards means having more money than you know what to do with.
For the healthcare professional we’re talking in the $5M-$10M range. How can a young doctor achieve this level of wealth? From what I have learned so far about finances it will involve the following 3 factors:
It’s not that doctors aren’t rich. The problem is that by the time we become rich we are in our 80’s. A 40-yo with $5M has more societal value than a 95 yo with $10M.
The longer you earn money and the longer you invest that money, the higher the chance of you growing your wealth and becoming rich.
It’s worth noting that many, many physicians end up with millions in their bank account in their later years – far more than they’ll ever be able to spend.
Contributing $5,000 a month for 35 years to a conservative index fund portfolio will have you end up with $9M.
If you increase your contributions to $10,000/month then you’ll end up with $5M after 2 decades. Keep that up for another 15 years and you’ll end up with $18M.
Time has a cumulative and compounding effect on your wealth. The longer you allow your investments to grow the higher chance you have of being rich.
Save up $1M and leave it along without adding any money to it and if it’s invested in an asset that can grow at 8% on average per year then that money will grow to $5M within 20 years.
If your momma starts you off with a $100k investment savings and you only add $1k/month to it from age 18 until 50 then you’ll have $7M in that account.
The final thing I’ll mention about time is patience. Those investors who didn’t panic during market crashes were rewarded with high returns after the markets recovered.
The lucky ones who were willing to take on the risk of adding more money to their investments while everyone else was panicking were rewarded with massive returns after the recovery.
If we backtest a portfolio of investing in a company such as Apple for the past 30 years then we can have a $20k investment become $10M.
The same could be said about certain collector cars and art pieces. This would require not only risk, however, but also resources to curate those items.
Higher risk can potentially mean much higher rewards. It can also mean loss. This is why rich people often become much richer – they have extra money they can risk.
I push early financial independence in my writing because the sooner we achieve this as physicians, the sooner we can take worthwhile risks.
Some will speculate on real estate hoping that an inexpensive home will be worth millions in the future. Speculating involves both risk and luck.
The physician with 15 rental units is exposing themselves to a lot of risk. Sure, they can profit deliciously in the end but it takes one bad lawsuit to create havoc.
Downsides of Risk
If you had invested $20k for those same 30 years in AOL then you probably would be SOL. Risk doesn’t always pay off but that’s why it’s called risk.
In order to become rich it’s an absolute necessity to continue taking on more risk even when you don’t need to. You may already have $1M in the bank and have very low household expenses, but in order to be rich you will need to keep working, investing in higher risk investments, and trying different investment options in order to get lucky.
It doesn’t take luck nor much risk to become wealthy. Steady savings and wise and conservative investing will guarantee wealth even for a person who earns minimum age. Math doesn’t lie.
For a physician to become rich she either needs a very high income, which is rare, or a combination of the things we have talked about: time, risk, and luck.
Luck vs Savviness
If you sold your primary residence for a $200k profit, it’s not because you were a savvy investor but because you were lucky.
If you can repeat the $200k profit time after time then you aren’t lucky but you’re a real estate investor – that’s the difference.
Risk & Luck
A person has to be willing to take on risk in order to growth their wealth but in order for the risk to pan out financially they must also have luck.
Fortunately there is a bit of a correlation in a capitalist economy where an investor can eventually capitalize on enough financial bets. The key to this is having disposable assets to risk and repeating the action enough times in order to capitalize on eventual luck.
If you can predict every market boom and crash then you aren’t lucky, you are incredibly knowledgeable about the markets. Not a single person exists who has regularly predicted all market swings.
If you can predict the next market peak and market low then you can cash out your investments right when the peak hits and get back in the market when the bottom is reached. This kind of timing will allow you unbelievable profits.
Utility of Being Rich
The premise of this blog is that you don’t need to be rich. I still think it’s important to talk about becoming rich because the process can be educational.
$10M will afford you a lot of experiences and goods but it won’t buy you more time nor will it buy you the feeling of security. It won’t buy you peace mind nor life satisfaction.
I am convinced that riches and notoriety are 2 of the hardest things for a person to handle in this world. Few can do it well and it brings more misery than joy.
There is nothing wrong with wanting to be rich because almost all of us are raised to think that way.
I can enjoy an exotic car such as a Bugatti as much as the person who owns it. The difference is that I can rent it for $2,500/day while the owner will need to:
- get on a waitlist to buy it
- protect it from the elements
- deal with the risk of theft
- pay for maintenance, repairs, registration, and insurance
- have the kind of house/garage where they can park it
- make the actual purchasing transaction
- eventually list it for sale and deal with the sale
To beat this dead horse, my recommendation for the young healthcare professional is to ignore the hype of being rich and instead:
- pay off your debt and don’t take on any more debt
- spend a lot less than your colleagues
- invest conservatively and regularly
- become financially independent
- cut back your hours of work
- enjoy the shit out of your life