No More Keeping Up with Dr Jones: New Year New Finances
Most doctors are blessed with having a meaningful and rewarding career they love. The average intern wage is around $70,000, rising well above average Australian income within a few years.
Doctors are in a privileged position of earning enough to cover the necessities (food, shelter, transport) fairly easily, providing opportunities and choices that only comfortable incomes can provide.
The oddities of behavioural economics can quickly become more pronounced, and preposterous in those with higher incomes. Many households feel trapped by ever increasing financial commitments, often not truly understanding where their generous income disappears.
Some doctors will spend all their generous income, failing to save enough for investments, emergencies, timely retirement (lavish) or (planned or unplanned) time off work.
The Hedonic Treadmill
While income is barely adequate, people dream of paying bills worry-free. Many feel that this financial security would be “enough”.
But barely as soon as this income level is exceeded, and the household is financial stress-free, aspirations tend to grow. It only seems reasonable to treat yourself to a better car, a bigger house and luxury holidays. Somehow the income is never quite enough to pay for everything.
The pleasure brought about by indulgent purchases tends to be short live, even if it provides ongoing greater comfort. We become accustomed to the greater level of comfort, and take it for granted.
Hedonic adaptation is described in a 1971 study which found even lottery winners’ long-term happiness wasn’t affected positively by their windfall. We risk never achieving contentment by continually chasing the next indulgence.
When people no longer have to worry about paying their bills, they can stop organising or planning their money.
Discretionary spending on luxury expenses tends to grow and fill the gap between income and expenses. Previously considered “Luxury spending” soon become considered “Essential spending”. Gym and golf club memberships, subscriptions and upgraded car payments are all valid ways to spend the money you earned – if you value them.
Thoughtless spending can increase to a ridiculous level. It’s easy to dismiss the 200%+ premium paid for convenience when $5 or even $20 doesn’t seem significant. The sense of value for money is lost, and replaced with “I can afford it” or “I deserve it”. In reality, this wasting of seemingly small values may be robbing the spender of more significant future rewards.
Do you track your spending to see how much really disappears through these thoughtless, often impulsive purchases? Is there a better way this money could be directed? Retirement savings, kids’ education savings and charitable contributions are contenders (maybe you have other ideas?). There has been a trend of social media of posting what has changed in your life in the last decade. Think ahead another 10 years, what would you like to have achieved? Does it really include buying more stuff to show off? Do you have any meaningful aspirations?
Spending should be guided by the priorities of the household. It seems as if this should be obvious and automatic, but often the two become separated and it a wake-up call to bring them back in to alignment
Keeping Up with The Joneses
Status symbols are everywhere, from the houses we live in, cars we buy and clothes we wear. People seem to aspire to showing off how rich and crass they are. The phrase “Keeping Up with the Joneses” is thought to originate from a 1913 cartoon about exactly this human behaviour. The rise of mass media, then social media has just added fuel to the superficial, self-indulgent fire of consumerism.
Advertisement is cleverly designed to take advantage of the almost unanimous insecurity of humans that we are not enough. How else can you explain the ridiculous decision some make to pay thousands of dollars on a bag?
Marketing aims to convince our subconscious the product is needed to “keep up” or boast! The most successfully promoted brands not only get consumers to pay top dollar for a product but plaster the company brands name across the product as free advertising! And we consumers seem to lap it up!
It all seems pretty silly, and most of us have probably rolled our eyes at hugely popular social media influencers making a living by posing as the images of “perfection” we apparently want to be.
But are doctors immune to this behaviour? Certainly not! Shackling themselves to excessive mortgages to buy the best house in the best suburb and buying luxury cars are not terrible decisions if the personal value or investment potential of these financial decisions are weighed carefully against opportunity costs.
The More You Earn the Less You're Paid
Income tax in Australia is progressive, meaning the more you earn the more you’re taxed. Tax rates peak at 45%. In reality that means, as a fully qualified specialist, you work for less net pay as you work more hours. Good news for those interested in lifestyle optimisation; cutting down to part-time will likely mean a smaller cut in income than you would expect.
In the example below a specialist earning a generous, but not unrealistic $250,000 gross annually for full time work and is considering cutting down to 30 hours per week.
Full time Specialist
0.75 FTE Specialist
Net annual Take home
Average Take home per Hour
Now this is a simplistic comparison, not taking into account the medicare levy, childcare rebates (which would both be more advantageous for the lower earning specialist) or the likely lower opportunities for career progression associated with part-time work.
Some doctors clearly live for the job and love to be there all the time? Others enjoy work more when they’re working less, or wish to spend more time caring for children.
Make Active, Conscious Spending Decisions
With a small amount of active planning, and practising conscious “switched on” spending a healthy surplus (or freedom fund) should be easily found which can be directed in to investments to provide you with choice in the future.
At the intern stage, most will have significant student loans to pay off, but there is no rush. Plan to live within your means during this year. Spend less than you earn and save something regularly (no matter how small and seemingly insignificant). Increase your savings each year as your wage goes up, and when they start to become significant (always surprises me how quickly this seems to happen) start considering a plan for making your money work for you.
There are many distractions along the way, and you will be surrounded by doctors buying fancy cars, and expensive houses, spending money as if it’s burning a hole in their pockets.
Subscribe to something that will help remind you to keep spending in line with your values, and set yourself a date to review financial goals once or twice a year (New year and tax time for me).
Remember to Allow Fun Money
It’s important to have some completely guilt free money – an allocation for each person in our household to spend how they see fit.
Our discretionary spending budget is allocated and automatically transferred to our individual accounts every pay day. It stops me feeling guilty for ever buying anything frivolous, allows me to save for selfish, but wonderful experiences, and stops my partner from raiding the financial cookie bin.
We also have a holidays account, which I have recently emptied to take the family to Lapland – a once in a lifetime trip I admit is self-indulgent but in line with my familys’ priorities.
What are your financial goals for 2020 and beyond?