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Your Investments Can Replace Your Income

Is your money invested in profit-generating assets or is it sitting around? Do you have different investment options but having a hard time deciding on where to invest your money? You definitely aren’t alone and it can feel a bit scary, as if you’re all alone when doing it.

It’s wonderful to have the kind of community of like-minded physicians who are on the same path as yourself – not just after more wealth but after sustainable financial security. If we know that others are doing the same then we can help each other through the more turbulent times when the economy behaves unexpectedly.

Being invested in something that let’s you sleep well at night is as important as adopting a practice style that doesn’t keep you awake worrying whether you did everything possible for a patient. No 2 docs can practice the exact same and no 2 healthcare professionals can invest exactly the same.

But we do have something in common that isn’t always pointed out, not even by our financial advisers.  I would say that no other profession can come close to matching our high income plus our job security.

These last 2 factors make it relatively easy for a physician to amass sizeable savings. And if invested, these savings can generate an income equivalent to what you’re earning hourly while slaving away at your job. Sure, you could keep working but it also give you the option to either incrementally cut back at your job or quit altogether once you generate enough to sustain your lifestyle.


Rate Of Returns Per Investment

Our economy exists because we have a system in place. Systems are what keep it going. Even if a particular financial system breaks down, it is often built back up either through the interventions of the government or by the demand of the customers.

This isn’t the right forum to discuss the US debt crisis or the lack of confidence the world has for our currency. And if that fear is keeping you out of any kind of traditional investing, then it’s best to build up your entrepreneurial skills. Healthcare will always be needed, you’ll be reimbursed for your services one way or another, so don’t go stocking up on ammo and cigarettes quite yet.

Real Estate – 7%

It’s fairly accepted that certain investments will produce a specific rate of return over a long enough time period. Of course, it all depends at which level you have a driver’s seat – if you’re the real estate developer, the crowdfunding investor, the single family home landlord, the REIT purchaser, hard money lender or a land speculator.

You can buy a plot of land, get the permits, build a 4-plex and rent out the units. Sure, it’s doable, my accountant has done this once and he’s been happy with the results. But he said it was the toughest 1.5 years of his life to get that project completed.

Most doctors don’t want to take on yet another job when it comes to investing. Therefore when it comes to real estate we are likely going to be landlords, REIT investors or perhaps do hard money lending to our friends who are full-time real estate investors.

As a landlord, it’s expected that you will earn somewhere around 5-10% a year on your initial investment. If you bought a $300k home with $60k down and pocketed $300/month – then you would have a 8% rate of return.

If you invest in REITs then you would expect an 7% rate of return. This is what my personal REIT has returned since its inception. Of course, it’s an average rate of returnMeaning, it’s the average of all the ups and down rates over a period of time. Again, these tend to hold fairly steady over a long enough investment horizon.

A Business – 20%

Quite a few doctors have some sort of sideline work that they are engaged in. It might be something they already enjoy doing as a hobby and have figured out a way to have it generate an income.

I have friends with bars, cafe’s, urgent cares, cosmetic offices, blogs, language centers, teaching courses and ADU’s in their backyards who are enjoying at least a 20% rate of return on their investment.

For clinicians it’s important to put a value on our time and factor that into the rate of return. If I have to be on site 8 hours a day as an Urgent Care doctor then that’s $1,000 in expenses I need to account for. Unless the goal is to eventually take me out of the equation, in which case my 8 hours could be considered an investment.

Stocks – 5%

I won’t talk about individual stocks. In order to do well in these, one needs either inside information or spend a lot of time doing research. The average healthcare professional won’t have the resources to invest in individual stocks. Mutual funds, such as passively managed index funds seems to be the better option.

I disagree strongly with the widely held stance that passive index investing is the only viable way to invest in the securities market. However, if you are going to let someone else do the active investing for you, by the time you are done paying for their time, fees, and the occasional mistake, you likely won’t do much better than investing passively.

If active investing interests you then it’s something that you would need to dedicate considerable time to. Can you get a high enough return for your time invested to make it worthwhile? Some do – many don’t.

A well balanced portfolio of stock mutual funds could provide a 5% rate of return. Some say it’s higher, some say it’s lower. However, I am confident that after accounting for taxes and fees, a range of 3-6% is a fairly safe guesstimate.

Bonds – 1%

Bonds are held by those who want to decrease the volatility of their portfolio and also decrease their risk exposure. In 2017, some are predicting the permanent downfall of bonds – just like many predicted the permanent downfall of real estate which recovered just fine – just like everyone predicted the downfall of tech stocks in 2001 which are leading the way in 2017.

So, bonds are here to stay. They won’t have sexy returns, that’s the whole point. After taxes and fees, it’s expected for a bond portfolio to have a 1% rate of return. 

Some laugh at this – but don’t forget, all you’re doing is depositing your money into an account and others are doing all the work while you are pocketing $83.33/month for every $100,000 invested – month after month, indefinitely.

Savings Accounts – (-%)

I don’t even think we should talk about this. It doesn’t make sense to deposit your hard earned money into a bank who uses it to make even more money and pays you less than the rate of inflation on it. There isn’t much left for the high-earning healthcare professional after taxes and inflation.

This likely won’t be the case forever. In our lifetimes, we’ll see banks once again coming up with ways to offer us better savings rate. However, for the time being, you will have a negative rate of return on any money you invest in a savings account.

CD’s – 0.5%

Current CD rates are picking up. For a few years they were some of the hottest products because a couple could park $500,000 in a structured CD ladder and earn $35,000 a year after taxes.

The average CD product these days is probably just barely outpacing inflation. A person invested in CD’s might be able to earn a 0.5% rate of return. And thought there is FDIC protection, it’s hard to predict how inflation will behave in the distant future – creating some risk for those who decide to lock their money up for 5 years for that higher CD rate.


How Many Hours Of Work Can Your Investments Replace?

The more you earn per hour, the more you have to have invested or the higher risk you have to take on in order to replace more of your working hours. However, the game is played on an even playing field because the more you earn hourly, the more you have to set aside to earn you a return.

My investment risk profile is quite low. I invest in passive index funds mostly so that I can sleep well at night. If all my money was invested currently, I would likely replace around 21 hours of work every month at my Family Medicine MD going rates.

If you are a Physical Therapist and are earning $40/hour gross then you are taking home somewhere in the $30/hour range. With $300,000 invested in a well diversified portfolio of passive index funds, you should be able to take home around $1,000/month. Because of the more favorable taxing of mutual fund income, you would be replacing 33 hours of work every month.

Justifying Going Part Time

If you are enjoying your work then the best thing you can do for your financial future is to keep earning an income. However, physicians aren’t the best at maintaining a healthy work-life balance. Though many might say they are enjoying the work, they might in fact be suffering unbeknownst to their colleagues or even themselves.

As you earn more money and invest more, you will generate more passive income. Some of your earnings from your investments can go back into buying even more investments or it can be used to live off of – replacing some of your hours at work.

A Pharmacist And His $300,000 Investment

A Pharmacist working full-time and earning a gross of $100,000/year, could replace 9 hours a week of work from a $300k investment in a mix of stocks and REITs. If he’s burnt out from work then he could reduce his hours by 25% and still earn the same as his colleagues while experiencing 25% less work stress.

But We Don’t Cut Back In Real Life

Sometimes it seems to me that there is no such thing as “enough” in our practice of life. I know that’s not true but it seems that way. There is so much self-inflicted fear and doubt when it comes to our financial security. I suspect it stems from not taking advantage of real life opportunities.

The Physician Fresh Out Of Residency

If I am a 30-year-old Family doctor fresh out of residency, I have ~$300k in loans and earning ~$300k/year. Adding more debt to my portfolio means that any income that my investments earn will be spoken for by that interest of that debt.

However, if I completely avoid further debt, by age 35 I will have my SL’s paid off and $300k saved up. By age 37 I should have an investment portfolio of $600,000. Then $1,000,000 by age 40. This is assuming I keep on working full-time until age 40.

Just knowing that we can cut back on work if we wanted to can be an incredibly powerful tool. It’s like a patient having an Epi-Pen, very few of them ever use it, but having them makes them feel empowered and less fearful.

At age 37, this doctor could have her $600k earning $1,500/month. This would allow her to cut back by 4 hours a week based on her hourly after-tax income. Knowing that you are earning on par as your colleagues seems to give many healthcare professionals a piece of mind.

Your Investments Can Replace All Your Income From Work

Once she reaches $2.5 million she would be replacing all her hours at work if purely invested in mutual funds. The reality would be that someone who is such a prodigious saver would be diversifying their portfolio and adding real estate or other higher-earning investment.

It’s up to the healthcare professional to keep on working in order to save more or to cut back on their job and invest their time into things of higher value. Value is quite subjective – in my opinion it would be amazing if we could give back to our communities by doing some pro bono work.


Takeaway Points For Your Money


1. Invest Your Money

Don’t leave your money sitting around collecting dust and losing value. It has an incredible ability to earn you an income, as much as your job. Invest it in whatever investment option that makes you feel comfortable.

2. Cut Back On Hours If You Need To

Healthcare professionals can suffer a lot emotionally, it’s the nature of the work. It can take its toll on you and a time will come in 99% of us when we need to cut back or even completely leave the profession. Through investing, you have earned yourself that option.

3. Learn About Investing

It’s one thing to be invested and it’s another to understand what your investments can do for you. I have written about dividends, appreciation, income properties, and REITs. Learn enough to feel comfortable and appreciate the tangible income from your investment.

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