As a physician, what is your ultimate financial goal? Is it to make it to retirement in one piece? Is it to be in a position not to have to work anymore if you choose? Is it to not have to worry about money anymore?
For many, the ultimate financial goal is to be in a position of not only not having to worry about money anymore but to accumulate enough wealth to not only do good during their lifetimes but beyond. They want to leave a lasting legacy that will take care of their heirs and charities for multiple generations.
Across the internet and social media, you’ll come across one or more of multiple variations of the theme of the various levels or stages of wealth. I came across one particular article that provided a succinct summary of the levels of wealth that I found helpful for physicians.
Here is the list with my commentary in italics:
This is the stage where you can pay your bills! 40% of Americans struggle to pay for basic needs, so comfortably covering expenses is a great first step.
Being able to keep your lights on consistently is a big step for some people. I don’t think you can truly be financially stable unless you’re free of consumer debt. Home and auto loans are unavoidable, but credit card debt is. Unless you’re free of consumer debt, I don’t believe you’ve achieved financial stability.
Indicators of Success: Developing the habit of saving money and eradicating any credit card debt are huge signs of success.
Saving for the sake of saving won’t get you to your goals. The interest from savings accounts does not even cover inflation. Now is the time to start thinking about making your money work for you.
At this stage, your army of dollar bills has a plan beyond simple cash reserves. Now is the time to make sure your money is working for you…
Here is where I diverge from most “Levels of Wealth” lists. While many pundits tout the merits of 401(k)s, the reality is a 401(k) will not help you achieve the highest stage of wealth. It’s not surprising since over 90% of professionally managed funds fail to beat the market. In addition, one study found that 48% of Americans with 401(k)s are unprepared for retirement.
Yes, it would be best if you started thinking about putting your money to work for you. With little extra time, physicians should think about passive investments that create multiple cash flow streams to accelerate the wealth timeline. Only by making your money work for you 24-7 will you be able to achieve the highest level of wealth.
Think of wealth as a machine. The more you put into this passive income generating, the more you get out and the sooner you can achieve your goals. Reduce your expenses and think of side hustles for generating more savings and capital for investment.
At this stage, you don’t sweat the small stuff. You have confidence that your financial strategy and life are in a good place.
Many physicians are in good spots financially. They feel good about their finances, but there’s this specter in the background few physicians want to acknowledge. What happens if you can’t work anymore? Financial security assumes you can keep working, but what happens when you lose the ability to do so?
At this stage, you go to work, and you’re able to keep up with your financial obligations. You meet your basic needs, but you’re not living your best life yet. You still have to be careful about splurging, and you’re still not giving to your favorite charity as much as you’d like.
Financial FREEDOM (or Financial Independence).
This is the level of wealth most people aspire to reach. At this stage, you can do what you want, when you want, how you want.
At this point, your passive income alone is enough to cover your expenses. In other words, you can walk away from your job if you choose. Financial freedom means different things for different people. For some, their expenses include a big house and multiple vacations a year. For others, their lifestyles are more straightforward. As long as your passive income is enough to maintain your lifestyle, you have achieved Financial Freedom.
Money doesn’t restrict you anymore. You have additional freedom to plan and decide what kind of purpose and legacy you want to leave.
At this stage, you can do whatever you want whenever you want and with whoever you want. Money has bought you the time you have coveted since those 80-hour weeks spent in residency and your day-to-day practice.
Your wealth will outlive you, and now you will make plans for your wealth beyond your lifetime. Don’t be like Cornelius Vanderbilt, who died the richest man in America but whose fortune was squandered within 50 years after he died.
How To Achieve Financial Abundance And Ensure Its Continuance For Generations
The wealthy make provisions in their estates to ensure their money is put to use after their deaths, just as it was during their lifetimes. I guarantee you that none of these estates have provisions for trustees and personal representatives to take the money to Vegas and put it all on black. The point is, achieving financial abundance doesn’t come from speculation.
There’s the rare lottery winner, but those who have earned their wealth didn’t get there by speculating. They avoided investments that relied purely on selling it for more down the road than what they bought it for.
While the average investor allocates almost their entire portfolios between stocks and bonds, the wealthy do it differently. It’s why they achieve financial abundance while the average investor fails to generate returns that can keep up with inflation.
The wealthy do it differently. Instead of allocating a majority of their portfolios to stocks and bonds, the wealthy favor two specific assets: private real estate and investments in private businesses (private equity).
Why private real estate and private equity? Because these assets possess the elements essential for building multi-generational wealth. These elements are:
- Cash Flow. Cash flow is essential for building wealth because the cash flow can be reinvested to compound wealth.
- Long-Term Windows. Long lockup periods for private investments insulate the assets from broader market volatility by preventing herd-triggered selloffs. Additionally, long-term windows allow the business or asset to develop and blossom.
- Tangible Assets. Tangible assets appreciate over time – providing another dimension of returns – and also insure against the risk of losing your entire investment.
- Tax Benefits. Significant tax benefits through pass-through of real estate and business depreciation and deductions allow investors to keep more of what they keep. The right partnership structures also allow for capital gains treatment on gains and avoidance of self-employment taxes.
Financial abundance takes discipline, and it takes investing in the right assets. It doesn’t come about from investing in speculative assets where only a small minority gets rich.
Physicians can achieve their dreams of financial abundance by investing in the right assets that offer cash flow, appreciation, and significant tax benefits.