Physician Financial Advice: Build Wealth From Nothing

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You can build wealth from nothing. I know, because I did it.  Actually, I started from “less than nothing.”  I had debt, few resources, and bad money habits.  But with some learning and a generous income, I was able to build wealth.  So can you.

The steps to build wealth from nothing are straightforward. They are simple.

That doesn’t mean they are easy.

But there is a plan to follow. Are you ready for this secret path?

Here it is as laid out by JL Collins in his excellent book, The Simple Path to Wealth.

The Three-Step Financial Plan


1. Spend less than you earn.
2. Invest the surplus.
3. Avoid debt.

Keeping it simple boosts returns and saves time. There are plenty more details in JL Collins’ book, but you could just implement this plan and be done.

Build Wealth From Nothing Step 1


Spend Less Than You Earn

Living “below your means” sounds like a sacrifice. It doesn’t have to be. Fortunately, physician incomes are high, so saving is affordable without suffering. Yet the majority of physicians do no save enough.

How much is enough? Since so few Americans save at all, the standard advice is to start saving. That means save anything. Save something. Some recommend starting with 1-2% and then working up to 5% or more. The goal of many financial planners is to motivate their clients to save 10%.

There is just one problem with that: 10% or less isn’t enough. Many of the physician stereotypes are true. We tend to be too trusting, overconfident in areas outside our expertise, and not knowledgeable of financial history.

Doctors start our high-earning and investing later in life. It doesn’t help that we carry high debt loads and aren’t great at negotiating or investing. You must overcome these hurdles in order to build wealth.  

We Spend Too Much

All these factors increase our minimum necessary savings rate. Jim Dahle, MD (the White Coat Investor) and others recommend doctors save 20% of their gross income. You don’t need a fixed savings rate. 20% would be a good target for a minimum savings rate. I don’t think that is high enough to be ideal.

The 20% savings rate pretty much guarantees you will have to work at least the standard 30-plus year career to be comfortable in retirement. Although we may choose to work that long, having more options earlier in our career would be a better route.

When Will You be Financially Free?

In general, physicians should shoot for a savings rate between 35-40%. That is based on your gross income. Your gross pay is the “top line” of your salary or paycheck. Figure a third or more of that and consistently sock it away.

Depending on your taxes and deductions my previously recommended 38% gross income savings rate will work out to about half of your net pay. Some find it easier to calculate their savings rate based on their “take-home pay” which is your “bottom line” or net pay.

Net Versus Gross: So Complicated!

Your net pay is after your payroll taxes and deductions.  As a result, net pay is much smaller than gross pay. Net savings rates will always be bigger than gross savings rates. Saving 38% or so of gross or 50% of net (equivalent for most of us) would get you to Financial Independence (FI) in about 17 years. Trust me, when you are FI at 50 years old you will be glad to be in the driver’s seat of your financial life. I’m not the only one crazy enough to suggest this level of savings.

JL Collins’ recommended savings rate is 50%. He is (I believe) referring to a gross savings rate. So that is much higher than I’m suggesting. It isn’t required, but if you want to achieve FI closer to 12-14 years, consider his recommendation. You get to choose. 

Don’t let me or anyone else try to dictate your savings or spending.  Build wealth on your timeline, not mine.  Personal finance is personal. Your ideal rate could be higher or lower. It depends on you and your situation.

No, It’s Simple: Shockingly Simple

Never forget the shockingly simple math of early retirement: The higher your savings the sooner you will reach financial independence.

Divert the money automatically to your investment account. A fixed amount or a fixed percentage can go from each paycheck directly into your mutual funds. The money I invest is the money I never see. I don’t have to decide or feel the sacrifice of not spending. I don’t have to actively transfer money with every paycheck. It is automatic from my payroll. You can do that too.

Build Wealth From Nothing Step 2


Invest the Surplus

So now that you have a “surplus” of cash coming from payroll you need to know how to invest.

What should you invest in?

Collins’ answer: invest in stocks.

Well, mostly.

Collins is optimistic about long-term equity investing. He cites irrefutable market facts to bolster his case. Throughout history, stocks have always gone up over significant time periods.  Stock prices have gone up over most 10-year periods, many 20-year periods, and all 25+ year periods.

Stocks grow and outpace inflation over the long-term. So, let’s say you have been persuaded to invest in equities (stocks). How do you know which ones? Maybe you need an advisor? Or a broker? Should you buy Apple or Amazon shares?

Question: Which stocks should you buy?

Answer: All stocks.

JL Collins recommends VTSAX which is Vanguard’s total stock market index fund. During your working years (Wealth Accumulation Stage), you could put 100% of your investment into that fund. It is low-cost and diversified.

Although some argue you need international investment, many U.S.-based multinational companies (like Starbucks and Wal-Mart) already do business in foreign countries.

But What About a Stock Market Crash?

If you can’t handle the volatility, Collins recommends you toughen up. His advice is a little different from other advisors. 

Other advisors would recommend you understand your “risk tolerance” and invest accordingly.  He argues your preferences shouldn’t drive investment decisions.  Acquire better understanding. Learn how to calm your nerves in a crash. Ignore the screaming panic in the media. Do not sell in a crisis. Learning how to deal with your emotions and investing more in stocks is a more predictable path to build wealth.

His argument is rational.  But many of us turn out to be human and we struggle with our own panic.  If you cannot tame your emotions during crashes, then you might want to invest more like his Wealth Preservation Stage.

His Wealth Preservation Stage is designed for those not working, but it would work well for those at any stage who can’t stand the volatility. That would mean you invest some portion (say 25%) in bonds.

Question: Which bonds should you buy?

Answer: All bonds.

He recommends VBTLX, Vanguard’s total bond market index fund. This will “smooth out your ride” and help during deflationary times.

If you want some bonds but don’t want to keep messing with percentages, you could pick a Vanguard Target Retirement Fund. You don’t have to pick the one assigned to you based on your age or date of “retirement.” You can select any fund. So, pick one with a high percentage of stocks.

Build Wealth From Nothing Step 3


Avoid Debt

This is a tough one for most of us. The average medical student loan debt has passed the $200K mark. Also, after years of ceaseless work and sacrifice, we are ready to start a “normal” life. Our long-suffering significant other may be equally tired of waiting. For many of us nearing the end of residency also means a new marriage, new house, new car, and maybe children.

All of these require money at a time when we have precious little. We want big expensive things and we want them soon. Debt seems like the only option. We tell ourselves we will be okay as long as we limit “bad debt.”

Is Any Debt Really Good?

We have heard that some debt may be “good debt.” We want to leverage our investments and good debt can help with that. Nevertheless, Collins’ advice is worth considering.

Debt not only adds leverage and boost upside returns. It magnifies and accelerates losses on the way down. Debt requires us to pay out interest payments in service of the debt. Whether those are small or large, deductible or nondeductible, they are a regularly required cash outflow.

Avoiding debt or paying off debt is doable. It seems impossible, but it isn’t. It is simple, but not easy. To start “from nothing” you have to first get up to “nothing.”  If your net worth is negative, you must get to zero before you can build wealth. 

Don’t be afraid to reach out for help. Lord knows I needed to. I learned a lot from Credit Card Counseling Service and from Dave Ramsey.

I Needed Help to Get Out of Debt

It is alright to get a little help and to learn from others. You may need a lot of help.  You may even need a total money makeover.  Once you climb out of the hole of debt, you will not miss owing money. Trust me.

I enjoy interest payments now. They all flow to me, not away from me. As Dave Ramsey points out, if you don’t like being debt-free it will be easy to go out and get yourself some loans. I will not be doing that! I’m guessing you won’t either.

You now have a simple three-step plan to build wealth from nothing (or less than nothing).  The rest is up to you.

Save. Eliminate debt. Invest. Mostly or exclusively in stocks. Choose low-cost broad index funds. Automate the process. Don’t panic in down markets.

Keep it simple. Let the disarmingly-simple wisdom of JL Collins guide you. There is indeed a Simple Path to Wealth.

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  1. Good points. You can live nicely on 50% of your income, I did that even in residency. It is especially easy if you do it from the start and increase up to 50% of your income when you become and attending. It is a lot harder to expend your lifestyle to all of your income and then cut back to living on 50%. Those are the people who don’t see how you can live on 50%. They just can’t see anything they can cut. (Read that as there is nothing I’m willing to give up that I have already started spending on) If you live on significantly less than you make, your stock pile of investments grows very rapidly. I know this not by theory, but because I did it myself. I was financially able to retire at age 50, earning the average income for a physician. You can too.

    Dr. Cory S. Fawcett
    Prescription for Financial Success
    Dr. Cory S. Fawcett recently posted…What I Wish the Younger Me Knew About DebtMy Profile

    December 24, 2018
    • Dr. Fawcett,

      There is nothing better for my readers than hearing from a voice of experience. Thanks for sharing!

      I agree. The key is to “loosen your belt” slowly. My wife and I typically spend a little more each year. We have been able to slowly spend more over a 20-year period. We have always lived well below our means.

      By focusing on “optimal spending” rather than maximal spending we have never felt deprived.

      December 24, 2018
  2. Xrayvsn said:

    My net worth has benefited quite a bit from my high savings rate. I have kept official records since 2016 and from then on I have always been at the 50-60% savings rate based on gross pay.

    With the income I make, that savings rate still allows me to have positive net worth increases despite the market drops we have had recently.

    I agree that 15-20% savings rate is too low for docs because of that late start and high debt burden majority face.
    Xrayvsn recently posted…XRAYVSN: And Then There Was Light!My Profile

    December 25, 2018
    • That’s amazing, Xrayvsn.
      You are on the right track for sure. It is great that you take detailed records too. That’s one thing I have not been good about. Although I never had a fixed savings rate, I know it has always been high. Even though I spend more and more I bet my savings rate keeps going up too since I reinvest my investment income as that grows. Once again it gets invested without me seeing it so it doesn’t feel like a sacrifice at all.

      December 25, 2018
  3. Gasem said:

    Wealth isn’t really built from “nothing”. When you are born you are born with a certain amount of human capital depending on your natural ability. You expend that HC over 65 or 70 years, but you may live to 90 or 100 so you need something to substitute for your human capital when you burn out and can no longer work toward the end of life. During the course of expending your human capital you might save some in the form of money and you might use some of that saved money to create a portfolio, which is a product you can use to substitute for human capital. A retirement portfolio does not represent your wealth it is a product you purchase with a specific goal in mind. There are plenty of techniques to build a portfolio and the one you describe works. The point? The portfolio is merely a product you purchase with your wealth, it is not your wealth. Your human capital is your wealth. It’s interesting Collins is the Guru of Retire Early but advocates no debt. Retiring Early throws away human capital early and therefore you need a larger portfolio to make up the difference. Instead of a 20 year pile you may need a 50 year pile. To grow a 50 year pile from only expending a small amount of human capital say 20 years REQUIRES leveraging your future. If you have 2M in the bank and expect to spend 5M into the future till you die, that extra 3M has to come from somewhere. If you work longer and retire with 3M in the bank and only need 3M to reach the other side of the dirt you’re living leverage free.

    If you understand these simple relationships you don’t have to MAN UP and GET YOUR EMOTIONS UNDER CONTROL, because the whole deal is laid out before your eyes from cradle to grave, risk reward, likelihood of success etc. You understand precisely the risk you take by throwing away your human capital too soon. You don’t have to come up with some stupid “risk tolerance” out of thin air you merely understand a bad sequence requires a little bigger expenditure of human capital to get an adequately sized retirement portfolio. “Risk tolerance” is simply another way of saying I’m willing to take on more leverage and a much higher probability of failure. Pretending to have big cojones is no substitute for running out of money at 85.

    Personally I believe in leverage on something like a property if I can get a better return in the market than the cost of the money. The payback is the difference of the relative interests. If I can take 2 dollars and invest one in a stock that returns 10% and spend one on a property, say a house at a cost of 3% over time I come out way ahead. The reason is both dollars are buying property, the the stock dollar directly buys shares that compound at a rate higher than the extra cost of the money to buy the house. After 30 years I own the house and I own 30 years of compounded accrued dollar cost averaged stock. If I spend all my money paying off the debt my compounding time is cut in half and the amount of stock I own is far less. The trick I noted is not too much leverage. Note I said you need 2 dollars. One to buy the stock and one to pay the for the house.

    This plus a few other hacks is how I made my dough.

    December 25, 2018
    • Wow, Gasem

      You raise a lot of points there. I’m not sure I have the time or brains to respond to all those ideas. I will mostly let my readers enjoy your insights.

      I’m not sure I would call Collins the Guru of FIRE. He is an articulate advocate for Financial Independence. He has had jobs on and off through his life. He enjoyed a lot of his working years and may still work more in the future. He took quite a few sabbaticals though and had the OPTION of retiring early if he wanted. He wants people to have F-U money so they can have more options to choose a life that fits them. For some it means early retirement, others work seasonally or intermittently, others may continue paid work forever and that’s all fine.

      There are a lot of ways to get rich. I’m really only offering up one path. It is predictable and low-risk. I know it works because this is what I did. I’m sharing it as a way, but not the only way. I have an aversion to debt and was able to build wealth a lot after I paid off all my debt.

      When I talk about going from “nothing” to “wealthy” I’m referring to financial assets. I may have been “wealthy” in terms of future potential human capital as a student or resident but that isn’t as valuable as millions of dollars in financial assets. Heck, the grocery store wasn’t even willing to give me a loaf of bread unless I had financial resources. I sure felt like I had “nothing” and my banker agreed completely.

      December 26, 2018
  4. Crispy Doc said:

    I enjoyed Jim Collins stock series, and have yet to read his book, but I’ll take your review as a reasonable summary.

    I wish I’d been more aggressive early on as he advises, I had the constitution for living a collegiate lifestyle with hand me down furniture and thrift store clothing tastes.

    Marriage is compromise, and what I get from being with my wife (herself quite frugal for a woman, just an order of magnitude less than I am) is worth the minor costs.

    She might day what she gets from being with me (organized for a man, just an order of magnitude less than she is) outweighs my inefficiency drag.

    Easier to put into practice when it’s one person, but still sound advice.

    Thanks for spreading the word,

    Crispy Doc recently posted…Director’s Perspective: How To Gracefully Go Part-Time (And Stay There!)My Profile

    December 30, 2018
    • CD,
      Most of JL Collins’ wisdom is readily available for free online. That is just how he rolls, so you are aren’t missing out.
      Personal finance is personal. There are infinite ways to adapt all this information. My path worked, but it isn’t the only way. It is good that you share your path and those of others. Hopefully, some of these will resonate with our readers. We are lucky that our incomes are high enough to make many mistakes for many years and still finish fine.

      December 30, 2018
    • I’m glad you liked it, Mr. Nicholas.
      Some of the DreamChaser writing is quite inspiring too.

      August 11, 2019

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