The Efficiency (and Unfairness) of Wealth

I have lived my adult life so far on a huge variety of incomes, now in my 40s with a small family and 5+ years into specialist practice.  As my income and wealth have increased, I have noticed a change in the way I am treated by businesses, financial professionals, and the Australian Tax office. 

As a medical student, I somehow managed to survive on a loan and a few thousand dollars from a part-time job.  Unfortunately, I didn’t record this at the time (too busy sticking my head in the sand re student loans), but I suspect I was living (reasonably well) on under $20,000 per year. 

This last tax year, I grossed over ten times that.  I have had an easy no-effort surplus of income to save a few times in my life.   What a luxury!

  1. During internship my salary jumped from $20,000 in loans to $80,000 and I blew most of it on lavish meals out, gifts and travel.
  2. During residency, I was renting a modest townhouse in a cheap area of town, combining finances with my now-husband to bring in an income of $110,000 gross.  Saved the surplus for my home deposit.
  3. Once I secured my job as a consultant, my pay took a big leap, but becoming a parent meant seriously saving for lots of expenses including retirement, childrens’ university fees, childcare fees and school fees.  We have made significant progress in paying down our mortgage, buying an investment property and contributing to superannuation.    I’m starting to feel on top of things financially, and that we are now on track to meet our retirement goals. 

It’s Expensive to be Poor

Money goes further the more you have of it.  An unexpected $2000 car repair bill is a financial catastrophe for a family living paycheque to paycheque.  This causes a lot of stress, and likely results in having to borrow money and pay interest, resulting in the poorer family paying even more for the car repair

For families that barely bring in enough income to cover their expenses, the credit/loan cycle is a dangerous black hole it’s hard to escape from. 

Having an emergency fund (even if it’s only $2000) is a major step in freeing yourself form the credit – interest cycle disadvantage. 

When you don’t have to scrape the money together to pay bills, paying on time can be rewarded with discounts, again saving money for the wealthier family.

If you only have $100 in the bank to last you until pay day and you need to buy groceries, you will buy the bare minimum to meet your family’s needs. 

Having money in the bank allows you to buy when the price is good, bulk buying to take advantage.

its expensive to be poor

Money in the Bank Efficiency

One of the biggest factors in building wealth over the last 30 years has been growth in Australian property. 

People lucky and savvy enough to be able to scrape together a deposit and buy property in Sydney 30 years ago really had to do nothing else to acquire significant wealth, which could then be used to create further income streams. 

Buying a home can be a great first step in building financial freedom, but is not always a good plan.  Don’t just buy any home expecting it to appreciate in value,

Money in the bank of homeowners is often placed in an offset, reserved for something else (holiday, car?) whilst simultaneously working hard saving interest on your home loan and shaving years off your mortgage repayments.

When my 10 year old car does need replacing, I will have the money right there to buy a well thought out a sensible reliable car.    This is far more cost effective than paying for a car of credit and paying interest on car loan payments – a major destroyer of wealth. 

I’ve had the cash to install solar panels on my roof, massively reducing power costs over the years, only becoming a more valuable asset as time goes on (as long as they last). 

Doctor discounts

You may notice this as a junior doctor even.  Companies find out you are a doctor, and they want your business.  You may be a broke intern finally getting your first paycheque, and no money to spend at the business, but companies with longsighted vision want to secure you as a customer. 

This is the reason financial advise / wealth management companies pay to advertise to you as final year students or interns. 

If I were the suspicious type I would say they like to capture you pretty naïve with low financial literacy, knowing your unlikely to switch once you have significant assets under management (money you have invested with them that they are siphoning their extortionate fee from) due to capital gains tax if you sell those assets, time and hassle.

Doctor discounts are heavily advertised for mortgages.  Doctors can generally get a mortgage with only 10% down and avoid lenders mortgage insurance, a major saving. 

This is not saying it is always a good idea to get a mortgage with less than 20% down, but if the property is well selected, and the value is likely to increase faster than your savings, then the earlier you can get in the better. 

Anecdotally, doctors have been able to negotiate harder with banks as desirable customers – with annual fees being waived and interest rates being further discounted.  The banks are not doing this to be kind.  Doctors are very reliable re-payers, and so low risk, and often take on significant levels of debt.

There are many companies that advertise through the colleges, medical indemnity companies and unions and offer a discount to members.  It’s worth checking to see if you can get a discount for large expenses through these connections. 

There are facebook groups such as Business for doctors, investing for doctors that have organised group discounts.  Again, worth joining if your on facebook anyway and looking out for discounts.

Money begets money

Its Not All Positive though: Societal Expectations

Doctors have a reputation for being wealthy.  Most earn well above average income within a few years of working.  There is an expectation that doctors drive a certain type of car, and live in a fancy house. 

But there is a huge difference between a large salary (which can all be spent very easily) and true wealth – a large asset base that will provide income going forwards even if you were unable to work.  Poor choices in house and car are powerful destroyers of wealth.  Society, your family, friends, colleagues and even yourself all reinforce these expectations of how a doctor “should” live. 

Try not to get these expectations get in the way of reality.  Work out carefully what you can really afford, and make sure you have planned for retirement, an emergency fund and a freedom fund (for changes of heart, sabbatical, burnout and family) within a short time of reaching consultant (or before!).

Spend the first few years making sure you are financially stable and set up for long-term security and freedom, and you can then start living the “doctor lifestyle” if that is what you desire. 

Divorce and legal cases

I have never, luckily (and touch wood) been through either of these.  But it is apparent that these are two events that can undo all your hard work over the years of living less than you earn, learning and investing.  Doctors have medical indemnity insurance, which should protect them in event of a medicolegal issue. 

But society see doctors as high income targets – for those looking to shortcut the learning, earning and investing with a frivolous lawsuits.  Luckily here in Australia we are not as far down the litigation road as the US, but will following in the same direction.  Insure well, actively assess and minimise risks.  When selecting assets to purchase, also consider carefully how to structure the ownership for asset protection – you will need professional advice here, but there may be an advantage in keeping your assets in your partners name, in a company structure or family trust. 

There is no way to protect your assets against divorce once the divorce is happening.  Choosing the right spouse is probably the only effective protection, but pre-nuptial agreements are worth considering if one party comes to the marriage with far more assets. 

 

Taxation

To make the system a little fairer, and reduce the rich-poor divide that would otherwise continue to widen due to all these factors, most governments use a “Progressive” tax system. 

Those earning more pay a higher % tax the more they earn. 

It’s always seemed odd to me that you are punished for earning high incomes through personal effort (personal services income) whilst income through a business or capital gains is advantaged. 

Those that plan to stream their income into assets that can produce capital gains or business income will be at even more advantage.  I’ve written a whole post on tax optimization. 

There are many ways in which having a larger than average income gives you multiple advantages that should help you achieve financial freedom within a reasonably short period of time. 

Societal expectations of a “Doctors lifestyle” leads to lifestyle inflation that can waste most of these opportunities. 

Don’t squander all your privilege.  Secure your financial future as quickly as possible and find a way to pay it forward.

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