Congratulations, you’re a doctor! Time to celebrate. You don’t need any financial advice, you’re going to make BIG $$, right?
Spend $$$? YES! Hold on, wait. I remember somebody mentioning some Dave Ramsey guy about getting out of debt? Maybe I should focus on student loans first, but I really need a new car and I’m tired of renting. I need a big house because I DESERVE it!!
Internal Conversations
Does the above conversation sound familiar? It did for me after I looked back after my training (8 years post-college) & I felt I deserved the BIG house, new car and hunting camp. After all, my friends had been enjoying these things for the last 5-6 years while I’ve had my nose stuck in a book. So I deserved them too!
Entitlement Syndrome
I admit. I used to suffer from ES (Entitlement Syndrome). I thought I was too good to need any type of financial advice. Thank God I got vaccinated! I think many of us do at some point in our careers. It’s only natural. We’ve had it in the back of our minds as we advanced through high school and college. Look, I know that many of us were sacrificing our free time with friends with studying instead to get “ahead in life.” For me, after graduation, it was only natural to want to release all of this pent up frustration & go and buy stuff. The world needed to know that I was out there. I’m a doctor so I need to act like a doctor, or so I thought…
Reality Bites
My plans changed a bit after my “dream job” fell through shortly before graduation. Read more about that here.
Here’s a quote that Sylvester Stallone tells his son in the latest Rocky movie about the reality of life that still sends chills up my spine whenever I watch the YouTube video of it. Here goes…
“Let me tell you something you already know. The world ain’t all sunshine and rainbows. It’s a very mean and nasty place and I don’t care how tough you are it will beat you to your knees and keep you there permanently if you let it. You, me, or nobody is gonna hit as hard as life. But it ain’t about how hard ya hit. It’s about how hard you can get hit and keep moving forward. How much you can take and keep moving forward. That’s how winning is done!”
That still fires me up every time I read it!
Don’t Be Stupid
Listen to what Shania Twain used to preach, “Don’t be stupid.” Meaning, don’t do what most docs do when they get out and avoid financial advice early on in practice. The White Coat Investor’s post about Living Like a Resident should help you head in the right direction. I realize you’re going to go from making chump change to six figures over night. I get that. If you’re smart, you’ll do what Dave Ramsey says when he tells folks that call into his talk show,
“If you will live like no one else, later you can live like no one else.”
The 7 Baby Steps to Financial Freedom
Here’s the financial advice that I took to become debt-free and have a 7-figure net worth after 10 years of practice. I basically took Dave Ramsey’s Baby Steps and slightly modified them.
Folks, this isn’t rocket science. If you want one less thing to worry about in life (money), simply follow these steps and I can guarantee you WILL be successful.
- Baby Step 1: Emergency Fund. Trust me, life is full of emergencies (especially when you have boys!) Set up a money market account with check writing privileges. Dave recommends that you start off with $1,000. If you can do more, such as $3,000 – $5,000, that would be better. In my opinion, $1000 is NOT enough initially.
- Baby Step 2: Debt Snowball. This was CRUCIAL in my path of staying focused and getting out of debt. List all your debts but the house in order from the smallest to largest. The smallest balance should be your number one priority. Don’t focus on the interest rates, only the remaining balance. Pay off the first one. Then add what you were paying on it to the next debt and start attacking it. When you start knocking off the easier debts, you’ll see results and stay motivated to dump your debt. As each debt is paid off, your cash flow will increase and the bigger debts will be gone sooner than you think. Before you know it, you’re debt-free! Example: Student Loan payment $1397.00 per month. Once that debt is paid off, take that payment of $1397 and apply it to the next debt in line to be wiped out. What’s cool about this strategy is once you’re debt free, then you can apply what you have been paying in debt payments to pay off your house rapidly. Imagine being debt-free with no house and a ton of money in the bank. It makes going to work that much sweeter.
- Baby Step 3: Now that you are debt-free except for the house (yes!) it’s now time to ramp up and fully fund your emergency fund. I personally am more comfortable with 12 months of expenses but if that’s too much for you at this point, go for 6 months of expenses. For instance, if monthly expenses total $12,000/month, for 6 months of expenses you need to save $12,000 x 6 = $72,000. This shouldn’t take that long to do now that you have no other debt payments except the house.
- Baby Step 4: Retirement. Invest 15-20% of your household income into retirement. This is where Dave and I are different in our approach. He recommends that you do NOT begin any type of retirement savings until you get out of debt. Most of us have a high enough income, in my opinion, that we can do both, save for retirement + get out of debt. I didn’t want to waste 6-7 years of compound interest building in my retirement accounts until I was out of debt. One of the easiest ways to automate this is to set up an automatic withdraw into your retirement accounts as you continue paying down debt. Once you are out of debt, there is no reason why you shouldn’t be able to save 30+% of your income. Come on, you want to be a millionaire as quickly as possible, right?
- Baby Step 5: College Savings. Now it’s time to save for your kids’ college expenses. I can’t tell you how many docs I’ve coached over the years that can’t retire because they delay this step. They look up as a 60 year old with no savings and typically blaming that they had to put all of their kids through college first and now they can’t even think about retiring. Start as this as soon as your kids are born. I typically recommend saving in a 529 account. Check with your state as many have “state specific” programs that will actually contribute to them each year. These are tax-advantaged savings vehicles that let you save money for your kids’ education expenses. As with retirement, you can also invest in whatever type of mutual funds are offered in them.
- Baby Step 6: Pay off your home early. This shouldn’t take too long to do now that you have no more debt payments. Can you imagine life with no house payment? I guess because I rented apartments for so long (9 years) and then took 11 years to pay off my house that it seemed almost surreal to never have to worry about a mortgage ever again. Many docs, myself included, begin cutting back the hours at work once they reach this point. I currently only see patients 3.5 days a week.
- Baby Step 7: Build wealth and give generously. At this point, you have no more debt payments and you will NEVER go back into debt, right. Repeat after me, “I will NOT ever take out a loan again.” Once you reach Step 7, you’ve made it. Unfortunately, most docs NEVER get to this point but I want you to be different. Continue maxing out retirement accounts & live the life that you’ve been wanting. Do you want to travel more? Take more time off to enjoy your hobbies? You can do this now that you have gotten to this step.