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Financial Independence Stages for Physicians

You may have come across the various financial independence stages such as the list below created by one of the best financial independence gurus out there, Joshua Sheats:

  1. Dependence (depending on others to cover your spending)
  2. Solvency (you are earning enough income to pay for your overhead)
  3. Stability (able to cover unexpected expenses)
  4. Debt Freedom (you’re debt-free)
  5. Security (basic living expenses covered by investment income)
  6. Independence (ideal lifestyle expenses covered by investments)
  7. Freedom (able to cover more aspirational spending with investments)
  8. Abundance (you have more money than you can spend)

I’ll use Joshua’s list to apply this to healthcare professionals. He is absolutely masterful in his wording regarding financial independence stages and so we’ll stick to his 8 stages.


1. Financial Dependence Stage

As physicians our financial dependency starts in medical school when we rely on student loans or parents to pay our way.

Some of my friends who are now parents hope to pay for their children’s education and they might make a horizontal shift in this stage but I am not convinced that it would make a meaningful difference.

Each of us has a financially dependent stage which we must get through. Taking on debt for education isn’t ideal but it can be a good financial teaching tool.


2. Financial Solvency

In residency we get to enjoy financial solvency. Our living expenses get covered by our residency incomes.

It’s incredibly important to not get into more debt at this stage. Falling prey to a mortgage or credit card debt or an auto loan can be crippling.


3. Financial Stability

I know physician who are in their late 40’s without any financial stability.

They don’t have an emergency fund, they don’t have their debts optimized, they are burnt out, and their marriages are on the verge of collapse.

This is the time when a physician should be saving cash for an emergency fund as well as cash for home. Taking on a mortgage is so 1990’s – the modern young attending could easily pay for the majority of their home in cash.


4. Debt Freedom

This stage means that we are done paying down our student loans and no longer have any unsecured debts.

A healthcare professional can easily make it through life without any debt after paying off the student loans. With the kind of money we can earn and with current home prices it’s incredibly feasible to reach 100% debt-free status within 5 years after finishing training.


5. Financial Security

Sometime around that 5-7 year mark a physician should also have $250,000-500,000 saved up. It might be a little lower for other healthcare professionals but not by much since they wouldn’t have the same student loan burden.

This kind of investment portfolio should allow for a potential passive income of ~$1,250/month which should cover the big-3:

  • housing
  • food
  • transportation.

These numbers serve as a guide and are milestones. The point isn’t to actually cash out your investments and mobilize that income unless it’s necessary for you to do so.

This is perhaps the most important stage to reach. No matter what happens, a frugal and savvy healthcare professional can always fall back on this potential income.

You are truly free when you have reached this financial security stage and it’s palpable indeed. When I first hit this point I felt it immediately – me demeanor and my outlook on life changed as well.


6. Financial Independence Stage

Lifestyle expenses for most physicians don’t just include the big-3: housing, food, and transportation. We also have hobbies, entertainment, people who depend on us financially, travel expenses, and money we spend on further education.

If your current lifestyle, including all the above, adds up to somewhere around $3,000/month and you have enough investments which are earning you that then you are financially independent.

It depends of course on what you’re invested in. Some physician investors are earning 2% annual portfolio returns in CD’s, some are earning 6% with individual stocks, and others 10%+ through real estate.  Below are the relevant portfolio sizes you’d need in order to earn $3k/month:

  • 2% – $1.8M
  • 4% – $900k
  • 6% – $600k
  • 8% – $450k
  • 10% – $360k

A good example might be a stock index fund portfolio which will earn you somewhere in the 6% range a year and from which you could easily take off about 4% a year without having to worry about draining the account.

Another example might be a beach bungalow rental you bought for $350,000 which is earning you $4,500/month in rental income. Leaving you with $3k/month after expenses – that’s a rate of return of 10%.

A final example might be a yoga studio you own which you manage passively as a hobby. Your income from this studio might be $3k/month after all expenses are paid.


7. Financial Freedom

There are physicians who are planning on traveling the world, buying their first Lamborghini or paying their parents’ mortgage. These loftier spending goals will stretch your overhead and would require even larger investment portfolios.

I don’t know how to not-be-productive so I am always going to earn extra income doing something I enjoy. It wouldn’t make sense for me to grow my investment accounts even more to cover these stretch expenses if I can cover that with my income.


8. Financial Abundance

What many physicians don’t realize is that if they reach their own financial independence stages by age 40 and let that portfolio grow then it will become a behemoth of an investment portfolio.

An $800,000 index fund portfolio will grow to be worth nearly $5M by the time my balls are touching the floor. Isn’t that financial abundance?


Reaching Financial Independence

I want my fellow physicians to become financially independent because we have relied for far too long on our education system, on our careers, and on our governments to manage our lives.

Medicine has become a tough work environment – incredibly rewarding from the practice side of medicine – but soul-sucking, logistically.

Budgeting is key for physicians. I’ve written a ton of posts and will continue to write a lot of posts because unique financial independence stages are reached by cutting expenses, paying off debt, and putting money aside in investment accounts.

Debt avoidance is the next important strategy. We fall prey to debt when we let our guards down. We confuse luxury with comfort and end up in a $1M home when we just wanted a $150k condo in a lively city.

Lifestyle designing is underutilized by physicians – I know this because most of these healthcare professionals seem to have dropped out of the same mold. They have expensive cars, expensive hobbies, designer clothes, and expensive homes.

We can live anywhere we want doing anything we want with the sort of incomes we earn as physicians. I can’t wait to see my fellow physicians acting out their creativity.


Don’t Focus On The Numbers

I have been thinking and writing about financial independence since 2012 and I have excessively focused on the numbers and less on the practical side of financial independence. Once I switched my mindset to the latter I’ve been more effective.

My previous approach forced me to work longer and suffer more than I needed to and set aside more money than I needed. I am incredibly wealthy with a net worth of $850k – I need half of this to be financially independent.

Focus on designing your ideal lifestyle and be mindful of costs. For some it’s helpful to get rid of everything instead of painstakingly dwindling down each expense category.

Your creativity can help you have the kind of lifestyle that nobody else thought was possible. What matters is that you enjoy it. That means that if you want to own a Lamborghini then go ahead and do so – rent it out on Turo when you’re not using it. And if you want to own a $2M mansion on the beach then do so by renting out a room on AirBnb

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