Have you heard of the White Coat Investor? He is a US based emergency physician and finance blogger. I have followed his blog for years, inspired by his challenges to physician group think when it comes to managing money. An early article suggested a simple but highly effective tip: Live like a resident (trainee doctor) for the first 2-5 years of specialist practice.
Why Live Like a Resident?
Society believes doctors are rich.
Doctors earn above average income with a year or two of graduating. We can earn very generous salaries depending on speciality and practice location.
But the critical point is that a high salary is not the same as being wealthy. There are specialist doctors on salaries of $300,000+ per year with very little assets or savings, and unable to understand where all their high salary disappears.
Receiving a high salary is not the same as being wealthy.
My point is, you have to put some thought and a little effort in if you want to achieve financial peace. Savings and investments provide freedom to take a break from work, or cut hours worked, if life circumstances make this desirable.
Most doctors see a large jump in salary with their first specialist position. WCI’s point out this ideal opportunity to practice delayed gratification.
By continuing to live off your trainee salary for a few years and investing the rest.
Live Like a Resident: Compound Interest
The graph below demonstrates the advantage of saving aggressively earlier in your career.
Living like a resident (yellow) here means investing $50,000 annually for five years post fellowship. The alternative scenario (blue) is investing $10,000 annually for a 25 year specialist career.
Both scenarios mean a total of $250,000 is invested, a 7% inflation adjusted return is assumed.
The slow and steady approach produces a $632,490 portfolio value at the end of 25 years. The living like a resident scenario produces a portfolio value of $884,421 over the same period.
How Much Money do Doctors Earn?
Below is my after tax salary from PGY 1 to the first year of specialist practice. I have adjusted it for inflation so the values are in 2020 dollars.
Obviously, the actual numbers are going to vary according to health network, contracts hours worked, and speciality.
You can see a fairly generous increase in salary year on year during training from internship to fellowship.
The grey line represents my income if I had worked full time as a 1st year consultant. Plenty of room to save significant amounts and reap the rewards of living like a resident.
The orange line is what actually happened – I worked about 0.5FTE and received slightly less than my final registrar year salary
Live Like a Resident: An Australian Perspective
Most are in a fortunate position in Australia, in contrast to our American colleagues. Student debt in Australia is modest in comparison, due to subsidized university fees and inflation linked interest.
Australian doctors receive reasonably generous jumps in salary as they progress in postgraduate years.
Specialist income is very variable depending on whether you choose general practice, different hospital specialties and private practice. General practitioners and private specialists start out without any guaranteed salary, needing to build their businesses sometimes from scratch.
There is a bottle neck in some specialties, with more registrars finishing training than there are jobs available. It is not uncommon for newly qualified specialists to locum for a while in less popular locations, or work part time until their ideal job becomes available.
This time of life often coincides with other large expenses or less hours work due to parental leave, family commitments, buying a larger home and school fees. There can also be unexpected life events that affect your ability to earn income or work full time.
I think living like a resident is great advise for newly qualified specialists. I don’t think it’s wise to delay saving and investing as a junior doctor assuming you can make up for it with a specialist salary that is not guaranteed.
Live Like an Intern, Resident and then Registrar
Lottery winners and large inheritance receivers are commonly bankrupt within a few years. If you haven’t mastered managing a small income, it is likely you will continue to spend all you earn with a larger income.
Don’t be fooled into thinking doctors are too smart to make this mistake. Doctors are just as dumb with money as the general population. Many unscrupulous finance professionals have taken advantage of medical professionals’ financial illiteracy, lack of time and trusting nature.
It is critical that you learn to live below your means. This is the secret to building financial security and eventually freedom.
As an intern, this means spending less than you earn each month, paying off any consumer debt and building a small emergency fund.
If When payroll forgets to pay you it’s less stressful to have enough in the account to cover expenses.
Each year as a junior doctor, you can expect your income to grow.
If you capture 50% of that increase or more you will be developing a great saving habit, and be far more financially resilient in case of future financial shocks.
The difficult part about capturing the extra, is that pay as a hospital doctor can be extremely variable. Pay varies depending on weekend, overtime, nights and public holidays worked. It’s also difficult to work out the effect of a small pay increase on after tax income, given the unfathomable complexity of your pay slip!
Aussie Doc Bank Account Structure
It is important to have a money management system that makes it easy for you to capture your savings, and doesn’t result in overdrawn fees (a common problem with too many accounts).
This is my suggestion:
- Open two accounts (or offsets if you already have a mortgage)
- Request all your pay is put in to your savings account each pay period.
- Calculate the average net pay received per pay period over the past 6 months or year.
- Set up a regular transfer equivalent to last years average pay period from your savings account to your spending account.
- Once regular expenses, non-essential spending budget per pay period (fun money) and transfer this amount to a 3rd account.
- Collect surplus effortlessly in savings account
- 6 months through the year assess savings, can increase spending (?fun money) by up to 50% of surplus if desired
I recommend saving a small a buffer (eg tax refund) before attempting to institute a money management system. A few less than average pays and an unexpected expense can easily sabotage the system otherwise.
Living on your previous year’s wage as a junior doctor is a great way to get into a savings habit without feeling as if you are making any sacrifices. Set up your accounts to make capturing the extra income easy. Use your savings as an emergency fund, start investing or saving a house deposit. It’s a great idea to “live like a resident” for the first years as a specialist, but an even better idea to start saving now.