Money and Doctors: Savings and Investing for Young Docs-To-Be

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.