I give lectures on business to medical students and residents,
mainly from the perspective of a physician.
Decades after I’ve finished med school, I‘m surprised our
doctors-in-training still receive little to no education in the basics of
business. How much do they know about business? Whenever I pose this question to residents or medical students, the typical responses are, “Zilch, nothing,”
or “Are you kidding?”
There is a saying about doctors and money, namely that the
title “M.D.” really means “Money Dumb.”
This misnomer is unfortunately not entirely untrue, based largely on
fact. Sadly, it’s a reality for many
physicians.
Following is the message I try to convey not only to young
doctors-to-be, but to my own children and any other person who seeks financial
security:
You must personally take ownership of your own financial well-being
by educating yourself on business and financial matters. Nobody will do this for you. Financial well-being depends on
wealth-building, and the game of wealth-building requires sound strategy--you must play good
offense AND good defense. Good offense is working hard to earn a good
income. Good defense is even more
important—save regularly, invest prudently, don’t overspend and avoid debt
as much as possible. Doctor’s for the
most part play good offense. It’s the
lack or complete absence of defense that kills them.
Every dollar you save goes to work for you. Think of each dollar saved as an employee,
one that works for you 24/7, who never sleeps, never takes a break. That employee is earning you money while
you’re sleeping, working, sipping pina coladas on the beach or sitting on the
can. Accumulate enough of these little
employees, and they’ll eventually finance your entire lifestyle without you
having to lift a finger.
Albert Einstein and Warren Buffet extolled the wonders of
compound interest. The former said it is
“the eighth wonder of the world. He who
understands it, earns it, he who doesn’t, pays it.” The latter used this powerful concept over
the long-term to build an enormous company (Berkshire Hathaway) and became one
of the richest people in the world.
Compounding growth is wonderfully logarithmic. This only happens if you regularly save and
invest your money, which in turn creates more money in the form of interest,
dividends and capital gains.
The goal is to buy real assets.
Think of an asset as a business that does not require your presence,
does not require additional work on your part to generated income. You’ve already put in the ground work
beforehand when buying the asset. Let it
work for you.
Beware of assets that require substantial work and time on
you part. Beware of “false assets,” such
as jewelry, cars, boats, big-screen T.V.s and collectibles such as your
collection of “rare” Beanie Babies.
Don’t record these things in your personal balance sheet as these would
create a sense of false security by inflating your net worth. Besides, if you were in dire straits, are you
really willing to part with heirloom jewelry, your stamp collection or hock
your Beanie-Baby collection for pennies on the dollar? Think of these items as personal belongings
and not assets. Items such as cars, boats,
electronic toys, etc. immediately devalue once you’ve purchased them and
continue to do so until they break down.
They’re more like liabilities, since they aren’t making but continually
costing you money in the form of maintenance, gas or electricity usage, insurance
and the like.
The best investments are one’s where you’ve done the
due-diligence beforehand, afterwards freeing your time for more meaningful
pursuits. Once you buy it, you ought to
forget about it. Think long-term. The asset should work for you, and not you
for it. You’re already working hard
enough as a doc—don’t add more unnecessary work.
Again, you want those dollars-as-employees working for you
to increase your wealth, and preserving your most valuable resource—time.
Another Buffet aphorism: you’re better off investing in an
index fund. Yes, coming from the value
investor, “The Oracle of Omaha,” who chooses his stocks wisely, Buffet believes
the average investor is better off with low cost index funds. You’re broadly diversified over a large swath
of companies and thus do not need to do a ton of research nor hover over the
investment diligently afterwards. And
index funds are a good way to start.
Start now, when you are young, even if you have a mountain
of student loans. Save and invest
regularly and let the power of compounding work for you. Put a little away each month into an index
fund—even as little as $50 or $100—and your nest egg will blossom tremendously over
time. This is called dollar-cost averaging, which avoids
market-timing and buying too much when stock prices are giddily high, which
many investors tend to do. You can also
have money automatically deposited from your bank account or withdrawn from
your paycheck, known as “paying yourself first.” You can then budget the rest of your expenses
and better control your spending once this money is out of the equation. This is part of your defensive play.
The other arm of your defensive strategy is to control
spending and debt. As their careers
blossom and they’re playing good offense in making money, doctors often fall
into the trap of overspending, adding to their list of liabilities, buying obnoxiously
large “dream” homes, luxury cars, vacation homes, fancy boats, etc. It’s a financial death-trap. These will continually cost money, depleting
your free cash flow, forcing you to work harder. Do you really want that?
Americans in general save little compared to other
industrialized nations. In some years
the average U.S. savings rates were negative,
meaning we spent more than we were earning! In my first years of practice, I saved about
10% of my gross income even though I had over $150,000 (in 1990s dollars) in student
loans. I put most of my money towards
loans but understood the need to save regularly, spread over retirement and
non-retirement accounts and into investment accounts for my two young kids.
Tough times for certain, but all this was doable. Once the loans were completely paid, the
savings rate went up to 25-35% of gross pay.
You can do this too. Control your
spending and ascertain what you really need and don’t need. Most of what we ‘need” are actually frivolous
“wants,” the danger being the more a “want” is satisfied, it eventually turns
into a “need,” which then becomes a habit, and habits are hard to break. I’m not entirely immune to this, having purchased
unnecessary items from time to time, only to later wallow in buyer’s remorse,
realizing they added little or nothing to our quality of life.
Over time your balance sheet improves as your assets grow
and your liabilities diminish, and you’ll find you are generating substantial
cash from your investments. You can then
buy luxuries. Keep in mind many
first-generation millionaires bought luxuries after they’d become wealthy—a little known fact. And often they avoided luxury items even
after they’d accumulated millions in net worth.
Many simply weren’t interested in that type of lifestyle. Don’t fall into the trap in which many
Americans find themselves--buying luxuries and a luxurious lifestyle before
they’re wealthy, with interest-costing debt, thinking they can continue working
hard to generate more money to sustain their lifestyles. Don’t be a slave to luxury, for the quality
of your lifestyle will diminish accordingly.
A luxurious lifestyle is really not the ultimate goal of
wealth-building, at least to my mind.
There will come a time when your net worth (assets minus liabilities)
reaches a point where you no longer need to work as hard or as long to support
yourself and your family. This is peace
of mind and can be wonderfully freeing. Your
reasons for work (or not to work) are agreeably changed and your quality
of life enhanced. It’s a new
sense of liberty.
So be vigilant, not complacent nor "Money Dumb" when it comes to your
personal finances. Of course, learning about business and investing requires time invested on the front-end, but the
returns are multiplied on the back-end.
You’ve done this already when preparing to become a doctor. You’ve spent tremendous time and treasure to
get to where you are now. You’ve
suffered years of delayed gratification, more than any other profession. Don’t blow it now by squandering money and
not properly securing your financial futures.
Use that same discipline, that same grit and determination that got you
to where you are now to improve your financial IQ. In doing so, you will find your way towards a richly
rewarding future.
©Randall S. Fong, M.D.
Comments
Post a Comment