[Editor’s Note: The primary mission of The White Coat Investor since we started in 2011 has been to provide financial literacy for docs, dentists, their trainees, and their students. But we know we’re not alone in teaching others about money and how to make it work for you. That’s why, every year, we honor the Financial Educator of the Year and give them the recognition they deserve (and $1,000). Nominations for 2022 are now open, so if you know somebody who’s impacted your financial life and the lives of others, complete this form by May 2 and let us recognize those who are making your financial world a better place!]
By Dr. Disha Spath, WCI Ambassador
Doctors – and other people who are used to earning a lot of money – often focus on increasing income in order to create wealth. And who can blame us? When it’s so easy to trade our time and skills for large sums of money, you can get caught up in the hedonic treadmill of income generation. Often, our expenses and expectations increase as income increases. But, there are certain times in life when we are reminded that the income we earn so easily cannot always be used to support our families. The sudden drop in medical visits at the start of the COVID pandemic is an example for many doctors.
My revelation of this truth happened a few years ago with unpaid maternity leave.
Just five years ago, my life was very different. I had just graduated from residency and my husband, an army captain, had just left the service due to medical issues. He enrolled in a master’s program and I went to work as a full-time hospitalist. He planned to stay home with our son and do his studies remotely.
“Of course I have that,” I thought. “Many families have lived on the income of just one doctor. We can do it too.
So we bought the doctor’s house in Georgia for $350,000 and some reasonable cars (two Hondas) and fulfilled the American dream (?) – mortgage debt ($335,000 + $130,000 for a rental property we already owned) , car debt ($40,000) and student loan debt ($237,000). All this amounted to three quarters of a million dollars in debt! After accounting for equity, we had a net worth of . . . wait for it. . . negative – $250,000.
The cost of maternity leave
Of course, each of the debts mentioned above produced a fixed cost each month that had to be paid with our living expenses. It was good; we could afford to make the payments—as long as I was earning an income. We were even maxing out our 401(k), paying a little more for student loans each month, and building up our emergency fund.
But, as soon as the income stopped during maternity leave, I was reminded of the cost of carrying a lot of fixed expenses and liabilities. We had very little wiggle room. Of course, we had saved a nest egg for maternity leave. But the payment break on my student loans that I had planned during maternity leave was not approved for some unknown bureaucratic reason and it put a strain on my family’s finances.
In this space of very little wiggle room, scarcity, and fear, I spent my maternity leave trying to sew a couch cover while listening to The White Coat Investor book. As I listened, I realized why I felt poor even though everyone thought I was rich. You see, I had bigger plans. I dreamed of being free from salary to salary.
I had also read Rich Dad, Poor Dad before and had in mind the framework to get there. I dared to try to take ownership of my time, to stop trading time for money, to work as little or as much as I wanted. Everyone else seemed to think that a doctor’s income would be enough to have plenty of money aside to invest. But the reality is that living the lifestyle of an upper-middle-class doctor on an internal medicine income often leaves very little extra money at the end of the month, especially when there’s student loan debt. in the picture.
We often end up being chained to our jobs and our pay to make ends meet at the end of the month.
Make a plan to go from broke to millionaire
I realized that to achieve my dreams of early financial freedom, we would need to make more room between our income and our expenses. Being a new mom, I wasn’t willing to work anymore. I dreamed of more cuddling time with my baby. But I could certainly control our expenses better.
So my husband, Josh, and I made a plan to turn things around quickly, before our kids got too cool to want to hang out with us. And we changed things.
We’ve gone from worse than broke to double-point club in just five years. I now work as much as I want and have plenty of time to spend time with my babies. Here is the short version of how we did it:
- We have collected all the data: First, Josh and I sat down and calculated our net worth (depressing!). This involved listing all of our debts and assets as mentioned above. We also made a plan to start tracking our expenses. This really meant looking at all the expenses on our credit cards at the end of each month and tracking them on a spreadsheet (there are apps that will help with this too, but spreadsheets worked better for my project manager husband ).
- We made a debt repayment plan: Then we took a close look at which debts we wanted to continue carrying and which ones we wanted to pay off. We decided to pay off cars and student loans (I worked for a for-profit company before the PSLF was overhauled, so canceling civil service loans was not an option). We decided to take the snowball method by opting for the smallest of these loans first: car loans. We spend all the extra money on our smallest debt while making minimum payments on everything else. We refinanced my federal student loans with a private lender to lower the interest rate in the meantime.
- We did the “magic delta”: What is the magic delta? It is the difference between income and expenses. Creating and maintaining the magic delta is the source of wealth. Easier said than done. Josh has increased our income by completing his master’s degree and returning to work. We cut our expenses by getting closer to the family so they could help us with childcare, selling our house and renting a smaller one for a bit (we made about $20,000 selling the house to because of some DIY improvements we’ve made), keeping a budget and reducing fixed expenses and becoming very selective about our day-to-day spending habits. You can find more information on the specifics in my previous article here on WCI.
- We learned about the finances and made a written financial plan: While we were working on our debt snowball, I really dove deep into personal finance. I took the time to read as many books as possible and listen to all the financial podcasts I could find. Soon, a unified theme began to emerge in my mind, and I began to understand the bigger picture. Both cars were paid off in about eight months, then the student loans were paid off over the next 17 months (!!). My husband and I took a CME trip to Hawaii to celebrate, and there we took the time to dream and write our written financial plan. In it, we described what we would do in the next phase.
- We performed: In the written plan, we decided to maximize all the tax-advantaged retirement accounts we have available each year. Now that we had greatly increased our magic delta, we could. We then saved a down payment to buy our next doctor’s house, a fairly large one but still met our 50% savings goals. After buying the house, which was about 1,000 square feet larger (and $130,000 more than our first doctor’s house), we set up automated investments in a brokerage account and 529s. Along with the equity investment, we are also aiming to purchase an income-producing rental property per year. We were able to do this with careful leverage and due diligence. Starting a business for my hobby of writing and personal financial education has helped us create even more room for tax-efficient investments and income.
In this way, we have decreased our expenses and liabilities and increased our revenues and investments over the past five years. I have also steadily increased my income diversity by working as a primary care physician, hospitalist, freelance writer, podcaster, speaker, and now as a WCI Ambassador.
I love that there are so many ways to build our financial freedom and that so many of you here are excited to learn it and teach it to others. I hope my story helps the WCI community, and I look forward to sharing the rest of our journey and growing with you.
It is entirely possible for low-income doctors and other new moms like me to create a financially stable future for our families. If we do a few good moves, we can make rapid progress. We just need to be a little more aware of the expense side of the equation and a little more creative.
For me, the goal of achieving quick financial independence took precedence over the priority given to financial flexibility. Some call this approach SlowFI. Recently, my boys told me that I was working too much and that they would like to see me more. Thanks to a comfortable magic delta, I can reduce my clinical working hours without sacrificing our financial stability.
In fact, I’ve found that whenever I reduce my clinical hours, I can usually make up for the lost income in a smarter way that makes better use of my time and effort. That’s the beauty of living below our means – it gives us the financial flexibility to prioritize exactly the things that are most important to us, so we can design a life that we really are. happy live.
How long did it take you to crash again after training? What measures have you taken? Have you found other ways to increase your income more efficiently? Comments below!