In this EPMonthly online exclusive, we sit down with Dr. Greg Henry and Dr. Setu Mazumdar to discuss the most important strategy for financial success: Thinking ahead.
In this EPMonthly online exclusive, we sit down with Dr. Greg Henry and Dr. Setu Mazumdar to discuss the most important strategy for financial success: Thinking ahead.
EPM: What are the biggest mistakes that young physicians make when it comes to their finances?
Setu Mazumdar, MD, CFP®: There are several of them, but if I had to choose one it’s this: people just graduating from residency aren’t paying off their debt quickly enough. I think the second one is that young docs are either spending too much money or they’re not saving enough – which are two sides of the same coin.
Greg Henry, MD: There is absolutely no question that debt management is a theory and strategy which every human has to master at some point in time. I think that debt in general is a tool; but if misused it can be a sledgehammer waiting to knock you out of the box. Debt should be carefully thought through – and paying it off quickly is the best philosophy. One thing most young doctors don’t know is that student debt cannot be discharged in bankruptcy. So if you decide to go a bankruptcy route at some point in time, all debt related to borrowed money for college and for medical school remains and it will hang over you. It is not a good thing to carry.
Mazumdar: When people talk about building wealth they often focus on the income that they’re making. But income is just cash flow. It does not necessarily equate to building wealth. The way I look at building wealth is that you have to consider yourself almost like a corporation. You’ve got assets and you’ve got liabilities. And the way to build wealth is to increase your assets and lower your liabilities. And part of those liabilities are all the debts that you have; whether student loans or mortgages or whatever. And so the way you build wealth is you build up equity in yourself. You increase your net worth by increasing your assets and paying off those liabilities; not necessarily focusing on the income that you’re generating every year. With income there’s only so many things you can do with it. You can either spend it, save it pay taxes. Right?
Henry: One of the biggest problems is that a lot of people entering medicine came from middle or upper middle class families. Usually not from terribly wealthy families because they’ve figured out lots of other ways they’re going to spend their life other than medicine. But upper middle class families where some of these kids never got a paycheck until they became a house officer. That’s terrible. One of the biggest mistakes I see is people get married and they’ve never had an honest discussion of what their thoughts are about money. One thing about my wife and I – we’ve now been married 46 years – is that we had the exact same view of how money should be managed, how it should be saved and spent. And if people don’t have those similar kinds of ideas, I think in the long run those can be the things that destroy marriages.
Mazumdar: My wife and I met in medical school. And both of our upbringings were actually quite similar in the sense that we both grew up poor. And so we saw eye to eye even before we got married on the whole issue of money in our lives. We saw money simply as a tool to buy us time down the road. That’s really what it’s all about for us. And so we made a commitment right out of the gate, right as we got out of residency, to save as much money as we could. And once you kind of have that mindset right out of residency, it pays you huge dividends down the road.
Henry: A doctor came up to me once and said, Greg, you know how you make a small fortune? And I said: No. He says: Start with a large fortune and then get divorced. Divorce is a Latin term for removal of somebody’s wallet through their rectum. And I think that when you think of all the people involved who make money off of divorce, it’s misery. If you’re going to get married, stay married and work things out. And I’ll tell you, the number one cause of marital disharmony that I’ve seen is that couples don’t know how to manage money. And don’t mean just the income that’s coming in. It’s about your expenses. Let me give you three or four things young people should learn to do that put them in a better position. Number one, learn to cook. I can’t tell you the number of young couples who buy food out every single day. It doubles or triples their food costs. Number two, learn to do simple repair work around your own house or apartment. Three, make a plan. Most couples spend more time planning their vacation than their lives. They need to sit down for a half hour or 45 minutes with a piece of paper and a pencil and say: How are we looking at money? What’s going to be invested and what’s it going to be invested in? My wife and I started the habit of paying ourselves first. We basically had no debts and we decided that before we buy anything else – new car or new clothes – we’re putting a certain amount of money into the investment portfolio and that’s that. And if there isn’t money left over? Well, we’ll find cheaper ways to amuse ourselves. Four, make sure you are taking care of all tax-advantaged savings plans – Roth IRAs – before you do anything else.
Mazumdar: I think emergency physicians get the saving/income/spending equation all wrong. Most people that I speak to think that savings equals income minus spending. But I think they’ve got it backwards. If you just kind of rearrange that equation, what it should say is spending equals income minus savings. In other words you should be focusing on what you’re going to save first. And then whatever’s left over is what you should spend on house, car, whatever. People get this backwards all the time. They wonder at the end of the year why they haven’t saved enough. It’s simply because they’ve gotten the equation backwards. Here’s a quick tip. I do this for myself every month. In the first week of every month, here’s what I do. I take a little spreadsheet. It’s not very complicated. And I just categorize gross income for the month, taxes I paid, total savings and then total expenses. I don’t really break it down into spending categories like food and gas. All I want to know at the end of the year is whether I’m hitting my big saving goals.
If you get into the habit of doing that just once a month for about 20 minutes each month, at the end of the year you know exactly how much you’re saving and what taxes you’ve paid, what you’re spending and what your gross income is. And those are the four key things that you need to know to really get your finances in order.
EPM: What’s your specific saving target?
Mazumdar: The financial experts will tell you to just save 10% of your income. But ten percent for an emergency physician is far too low. My advice is that your savings rate – the percentage of your gross income that you save every year – should go up as your income increases.
Here’s the sort of rule of thumb that I use. If a household is making $200,000 in gross income, at a minimum they should be socking away 15 percent, or $30,000. If they get a raise to $300,000, the dollar amount saved should go up obviously, but the percentage itself should go up also. If you’re making $300,000 I recommend at least 20 percent of that gross annual income, which is at least $60,000 annually, should be saved. If you’re in “evil rich” category and you’re above $500,000, you should really be saving at least 30 percent of that gross annual income, which is at least $150,000 a year.
When I tell people these numbers they look at me like I’m nuts. They say there’s no possible way they can save that much money. But I tell them, when I graduated from residency in 2001, I was saving 40 to 50 percent of my gross annual income every year. If I can do it, almost anybody can do it. It’s just a matter of retraining your mindset to change that saving/spending and income equation.
Henry: Those are exactly the numbers that I’ve used over the years. And at a certain point in time, your money should be making you money. I’m 68 and now I’m looking at the ability of my investments to make me plenty of money during my retirement. And the only reason I am able to do that is because we thought about it in our 20’s and 30’s and 40’s.
You can’t start thinking about your finances at age 50. If you’re counting on the government taking care of you in your old age, good luck with that.
EPM: For the sake of argument, is it possible to save too much, missing out on youth and opportunity in the hopes of future enjoyment?
Henry: There is such a thing as having the poverty mentality. No matter what size house I had at any point in time, we made it nice. We made it a desirable place to live. I never thought that buying a car every year was a good idea anyway. And I worked on vehicles. So, you know, I never felt like we were sacrificing. Your life should be a series of adventures. My only real regrets in terms of spending is when I wasn’t bold enough on certain investments. I never once sat around thinking: Oh, woe is me. I should be having more fun. You know, a lot of things that give me fun don’t cost me any money.
Mazumdar: Let’s say you get out of residency and you make a gross annual income in emergency medicine of $300,000. I’m going to assume you’re going to pay 35 percent of that in some type of tax, So that lops off $105,000 in taxes. Let’s say that you got that spending income and savings equation correct and you socked away $65,000. So now you have $130,000 of after-tax, after-savings income that you can do whatever the heck you want. That’s close to $12,000 per month. My question is: who cannot live off of that? It’s a first world problem.
Henry: Part of this is identifying what really gives you and your spouse gratification? When I finished my internship, my wife and I took six months off. We traveled in Europe at a student level. We’d saved our money. She worked as a teacher. I worked as a first year house officer. I think in those days we made about $11,000. But the point is we took that money and spent it on something which gave us a huge return on the value. We actually got something we wanted, which was that time off. I was an art history and English major, so we traced the outlines of the Roman Empire in Europe and North Africa. It meant something to us. It had meaning. And a lot of money is spent without meaning.
EPM: Setu, for a doc early in his career, what is the value of this money that you’re saving? What are you saving for?
Mazumdar: For me it’s buying time. That’s all it is. It’s exchanging money for time. For me it wasn’t really about buying the biggest house or the biggest cars. Heck, I still drive my 11-year-old minivan. For me it was that freedom to do whatever I want.
Henry: This is a choice question. The only thing money gives you is options. It doesn’t buy happiness. With enough money I think you can rent happiness. But it gives you the chance to make choices. And it’s a tool. It’s hard to be an emergency doc wrestling drunks at 2:00 o’clock in the morning when you’re age 70. You are going to want to do some different things. And money gives you the tool to decide what kind of work you will do when and where.
Mazumdar: I hated working the night shift. I never got used to it. I just couldn’t stand going into the nights. My whole schedule got messed up. I have to eat horribly. The next day was gone because I’d be a zombie. But once I’d saved enough, I got to the point where I could choose to not work nights. I just cut my shifts in half. I went from 15 or 16 shifts a month down to seven or eight. And yes, my income went down. But it didn’t matter at that point. I gave up all those nights. And I’d get calls from recruiters and all these people asking me to work extra shifts. And I’d be like: Well, I don’t really need the money. The biggest thing I hear at emergency medicine conferences is that people have control over almost nothing in medicine. They’re sick of government regulations, EMRs, hospital committee meetings, patient satisfaction scores. They’re constantly worried about lawsuits and pay-cuts. They’re burned out. They’re unfairly blamed for the rising healthcare costs and not paying their fair share in taxes. And then they tell me that they wish that they could work less or quit altogether. And every time I hear that I think it’s the money that gives people options. If you don’t want to work full-time, that’s fine. Work half-time. Work part-time. Take a month off. Do whatever you want to do.
EPM: If a young physician could tweak their finances in one way this year to get themselves on a better footing, what would it be?
Henry: Look at your life in a longer perspective than one year. The problem with emergency docs is we’re all ADD, ADHD. Two days is a long time to us. Two weeks is an eternity. I want you to sit down and ask yourself some real life questions: What would you like to be doing at age 30, 40, 50, 60? As I say, I am pushing 70 here. I still love emergency medicine and I want to do aspects of it. But I don’t want to do all aspects of it. So I think having that longer term perspective of what is essential. Short-term thinking leads to long-term problems.
Mazumdar: Similarly to Greg’s answer, I’d tell young docs to figure out and prioritize the top two or three long-term goals that they’re trying to achieve in their life. Is it spending time with their family? Is it their health? Is it religion? Is it their career? And how does money play into all that? Figure out how you’re going to equate money to all these other things that are important to you in your life? That’s the biggest thing they need to sort out I think when they’re starting out.
Henry: By the way, I dislike intensely those people who don’t seriously talk about money. Some act as though it is beneath their dignity. But I don’t know anything in the world that doesn’t have an economic perspective or basis.
Mazumdar: For most people there’s five essential categories impacting our lives: family, health, religion, careers and money. And money fuels and influences them all. It’s a central aspect of everything else important in our lives.
Dr. Setu Mazumdar is board certified in EM and president of Physician Wealth Solutions. Dr. Greg Henry is the founder and CEO of Medical Practice Risk Assessment, Inc.; past president of ACEP.
3 Comments
Debt is essentially renting the use of money. If you were renting an apartment or a car or a hotel room, you’d shop for the best deal you could find. Renting money is the same. Don’t rent more than you need, don’t rent for longer than you need, and don’t rent for anything other than essentials. And don’t rent when you can buy.
39.99% Federal; 9.99% State;15% Social Security/Medicare/Unemployment etc; 6% sales tax, etc, etc, etc, (Do I sound like the King of Siam?) You, dear doctor, are in the 65% tax bracket. Love, Healy
Jim, I could not have said it better myself. Too bad the US government can’t figure this out. In my first economics class 52 years ago we had a firery debate over a 1 billion dollar raise in the US debt ceiling. At that time the entire debt starting in 1776 and including everything from the first shot of the Revolutionary, the Civil War, WWI, WWII, The Great Depression, and the Vietnam War was 270 billion dollars. That isn’t even a rounding error today. God forgive us for what we did to our children. Greg