Rich vs. Wealthy Doctors

 In Blog

Medical Degree? √
Residency? √
Board Certification? √
High-Paying Job? √
Big New House? √
German Cars? √
Private Schools? √
Exotic Vacations? √
Fancy Clothes? √
Big Mortgage? √
Lots of Debt? √
Student Loans? √
Financial Independence? Not Quite

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The Average Joe looks up at the ivory towers physicians live in and assume they’re all rich and wealthy.

The Average Joe assumes that anybody who’s making six figures must be rich – even more, so physicians who make, on average, $300,000 a year.

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Compared to the U.S. median annual household income average of $60,000, doctors have it made, right? Not exactly.

The Average Joe is right and wrong to assume doctors are rich and wealthy. While most doctors are rich, many are not wealthy. There’s a difference. Rich means having a high income and having things but not necessarily freedom. Wealth means having time.

Many people are surprised to find out that many doctors, although making $300,000 a year, live paycheck-to-paycheck.

They’re rich in “things,” but dig a little deeper, and they’re actually cash-poor. Their high incomes after paying Uncle Sam at the highest tax rate of 37% barely cover their student loans, mortgages, fancy cars, memberships, and vacations.

Cash-poor physicians suffer from two ailments:

  • The pressure to live up to a certain societal image of physician lifestyles.
  • The guilt of putting their spouses and sometimes children through long, lean years of medical school and residency, and now they need to overcompensate with things to make up for their sacrifices. The symptom for these physicians is to perpetually live beyond their means.

The long-term prognosis for living like this is not good.

Cash-poor physicians are rich in non-productive things. Cars, toys, vacations, etc. are all-cash vampires. All these non-productive assets do is take and take. To keep filling the void left by endless spending sprees, physicians work longer and longer hours.

Wealthy physicians, on the other hand, allocate their cash to productive assets – assets that give back instead of taking. They gravitate to passive investments that make them money while they’re sleeping.

Wealthy investors are not satisfied with one additional stream of income; they’re seeking multiple streams to:

  • Build wealth.
  • Insulate their wealth against economic downturns.

So instead of losing sleep to cash vampires like the rich physicians who have to burn the midnight oil to make ends meet, wealthy physicians rest easy and work because they love what they do and not because they have to work.

Wealthy physicians gravitate towards cash-flowing passive investments backed by tangible assets that appreciate over time. And they prefer private investment vehicles to leverage the expertise of others and for the significant tax benefits.

Unless rich physicians learn to rein in their spending and debt in order to save and set aside capital to invest in productive assets that give back, they will always be trading time for money.

Sadly, they will work until they die and leave little for their heirs besides depreciating assets.

Physicians who take the leap to pursue the life of the wealthy physician who’s in the position to trade money for time will immediately realize the power of passive cash flowing investments.

Wealthy investors prefer private income-producing real assets for a reason. That’s because not only do they provide an income stream essential for building wealth, but they’re backed by a tangible asset, appreciate over time and benefit from favorable tax treatment.

Consider the following:

  • Imagine starting out with $100,000 in a passive investment that pays 10% per year.
  • Because the annual $10,000 distribution is considered passive income, it’s taxed at the capital gains rate, which we’ll assume is the top rate of 20%.
  • After taxes, this leaves $8,000 to put back into the investment. The lower taxes accelerate the compounding effect of passive income.
  • After ten years, this investment will have a value of $215,892.50.

Now, compare that to parking that $100,000 in a savings account, paying a top rate of 1.6%.

  • Because interest income on savings accounts is taxed at ordinary rates, at the top rate of 37%, that would only leave $1,008.00 of the $1,600 interest earned for reinvestment.
  • At the end of ten years, the savings account will have a value of $110,549.74.
  • So while the savings account earned a total of only $10,549.74 during that ten-year period, the passive income investment earned $115,892.50.

That’s why savvy physicians are anxious to dive immediately into passive income investments – to buy back their time. The cash flow component, along with the favorable tax treatment, accelerates wealth building.

Imagine in the previous example if the physician added just an additional $10,000 each year to his portfolio. At the end of ten years, that portfolio will be worth $372,347.37. At the end of 20 years, $960,324.93 and at the end of 30 years, $2,229,724.37.

Rich physicians and wealthy physicians are where they are because of priorities. The rich are focused on income and accumulating non-productive assets with this income—the rich work for their money. The wealthy physicians are more interested in net worth, not income.

This contrast in priorities directly impacts the two groups’ approaches to income and expenses.

For the rich, it’s a classic case of the tail wagging the dog – the tail being their expenses and the dog is their jobs. The rich work for their money, which is risky because they rely on the active income that’s limited to the hours in the day. This income can stop at any time – like when a physician is incapacitated for one reason or another.

The wealthy are more interested in passive income – income that works for them. They want their money to work for them 24-7.

In order to accomplish that, the wealthy physician’s attitude towards money is much different than the rich physician:

The wealthy physician isn’t seeking a higher income to buy more toys. They’re seeking a higher income so they can allocate more assets towards productive investments.

Higher-income, coupled with lower expenses, results in a bigger war chest for investing in passive investments that will grow exponentially over time, as we described above.

It’s easy to spot the rich physicians: They have the biggest houses, the most expensive cars, the nicest clothes, etc.

It’s not so easy to spot the wealthy physician: They are content with a 3,000 square foot home instead of a 6,000 square foot home. A mid-priced sedan suits them just fine. They don’t need the $120,000 Mercedes. They prefer to put their money where that money will pay them back. That’s why they save up to invest in passive investments.

Passive income providing regular distributions is the key to building wealth.

The wealthy physician established a wealth machine where cash distributions are reinvested to boost future distributions that will once again be reinvested and so on, and so on.

They reduce their liabilities and do whatever it takes to free up capital to throw into this wealth machine.

The only way for cash-poor physicians to get out of the clock-punching cycle is to follow the example of the wealthy physicians who reduce their expenses as a vital part of their investment strategy and not just to have more money to put under the mattress.

The wealthy also have a goal to increase income, but the type of income they’re after isn’t limited to the hours in the day.

Passive income doesn’t sleep. It’s generated 24-7 and, if invested in the right assets, continues to pay even during downturns.

Eric

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