Saving Your Way to Wealth

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Physicians overlook one rather obvious fact: income and wealth are completely different things. Despite a high income, you will not become wealthy if you do not save. Wealth is based on savings. News outlets describe people with high incomes (e.g. 250k) as “rich.” This ignores the obvious difference between the two.

Focus on Wealth, not Income

Financial Freedom springs from wealth, not a high income. Freedom may mean less dependence on external funding to start or grow your business. For you, that may mean cutting back to part-time. For others, it may mean taking a sabbatical or early retirement. The peace of mind and freedom give you options.

Many of us experience “hedonic adaptation.” It takes more and more spending to maintain our lifestyle.  No matter how many raises and bonuses come along spending increases in proportion. As a result, we are financially insecure. When the recession of 2008 hit many high-earning people realized they were not high net worth people. They didn’t have so many options or freedom after all.

Bank Your Earnings

How much money you have right now is determined by how much you made versus how much you spent. What you have “in the bank” is the difference between the two. For a shocker pull out your social security statement. Add up all that you have made in your lifetime. Subtract what money you have. That is how much you spent. I bet it is a huge and surprising number – at least it is for most of us.

Did you spend your wealth on cars, T.V.s, exotic trips, and keeping up with the Jones’s? Any regrets? Forget the past and look to the future: Could we be more diligent in our spending going forward?

Live Below Your Means

If you ever want to become wealthy, you need to “drive a wedge” between your earning and your spending. The key to wealth is living below your means. The larger the wedge, the faster your wealth grows. This is often thought of like a savings rate. The larger it is (the steeper the wedge’ slope), the quicker your wealth will pile up.

Save Your Way to Freedom

Question: How long will it take to save 1 year of income at a 5% savings rate

Answer: 19 years

(Years to one year of income = Spending / Savings (all as a percentage). Therefore, if you save 5%, you have spent 95% (100 – 5). So, it would take 95/5 or 19 years to save one year of income).

The average American saves between 0 and 5%.  What if you follow the advice of many personal finance advisers and save 10% of your income?

Well, let’s see: (100 – 10) / 10 = 90 / 10 or 9 years until you save one year’s income. If you want to end up with 1M and you make 100K a year, it will take you 9 x (1M/100K) or 90 years to save 1M.

At 20% it would be (100 – 20) / 20 = 80 / 20 or 4 years to save one year’s income. With this savings rate, it would take 4 x (1M/100K) or 40 years to save 1M. That doesn’t sound like a quick path to freedom to me.

Consider Extreme Savings

OK. Now let’s think out of the box and get a bit radical here. What if you saved 75%? That would be (100 – 75) / 75 = 25 / 75 = 1 / 3. That means you can save three years’ income in one year! That adds up fast. After 10 years, you could have 30 years of expenses saved up.

75% savings rate is likely too high for most of us.  But could you save 30-40% of your gross income?  I bet you could.  That would lead to Financial Independence (FI) in 15-20 years.  Financial Freedom at age 50 is invaluable – trust me!

Make a Savings Plan

Most of us are amateurs when it comes to savings. We focus too much on boosting income. We may have an investment plan, an education plan, an income-boosting plan, a tax plan, and a career plan. It is worth creating and implementing an aggressive savings plan.

High savings rates seem daunting but are achievable with a solid strategy.  Fortunately, others have done it and are willing to share how.

Jacob Lund Fisker wrote a great chapter for Michael L. F. Slavin’s book, One Million in the Bank. Jacob created the website, Early Retirement Extreme (and a book by the same name).  He preceded Mr. Money Moustache. Here are some of the points from his chapter.

Wealth and Savings

Jacob points out that many focus on tiny expenses. If you switch to a cheaper brand of paper towels or avoid using them altogether you will save some money. Switch from daily cappuccinos to a daily home-brewed coffee and having a latte on only weekends will save money. The problem is there are hundreds or thousands of these little decisions. They can add up to a lot but in the process, you can develop decision fatigue. You might get burned out from making hundreds of frugal choices daily.

Use the Pareto Principle

There is a better way. It comes from an Italian economist, Vilfredo Pareto. It is usually described as the 80/20 principle. If you figure out what your biggest expenses are and go after them in a big way you can save tens of thousands of dollars with only a few choices.

Use your own expense data if possible. Rank them per size from largest to smallest as a percentage. If you don’t have your own data or struggle with that analysis, use data from the Bureau of Labor Statistics.  They publish categories and their percentages in the average U.S. family budget.

Pick the Big Rocks

1. Housing (33%), a large fraction is utilities
2. Transportation (17%)
3. Food (13%)
4. Clothes, personal grooming, and entertainment (10%)

That adds up to 73% (the sum of 33 + 17 + 13 + 10) of spending is in only four categories.

Three-quarters of the average household budget is spent on just 4 categories.

1. Housing and Utilities

Most people own too much house. They are cash poor. The standard American mantra of “buy as much house as you can afford” doesn’t serve us well. It may be fine if you are a lousy saver and don’t want wealth and don’t mind working for 30 years. If that does not describe you, consider other options. Spending money you don’t have on a house that barely appreciates annually is not the best choice. Buy only as much house as you need. Don’t confuse your needs with your wants.

For most of us, a house is mainly for two needs: a place to sleep; and a place to store our stuff. Does it make sense to you to spend 30% of your income on storage and a sleeping area? Smaller may be better. The upfront costs will be lower (purchase price, closing costs, loan fees, etc.). It will cost less to heat, cool, maintain, repair, and improve. About 2/3 of the expenses are furniture and utilities and they are both dependent on size. Property taxes are often proportional to the house’s price.

2. Transportation

Most American households have a car. In fact, it accounts for 1/5 of their budget. Does it make sense to spend that much just to get from place to place? Maybe you are living in the wrong location? You are paying to overcome this inefficiency. Could you live close to a grocery store? Could you bike to work? If so, this would save time, gas, maintenance, and repair costs. Not to mention your health benefit and the environmental impact.

You may not need a car at all. If you do need one, buy something reliable that runs forever. Affordable cars like a Honda Civic or Toyota Camry are comfortable, safe, and fuel efficient.  They come with many convenience features that were unavailable in luxury cars a decade ago.

It is normal to want to impress people with your possessions.  Just remember the financial freedom you sacrifice in the process.  Either way is a personal choice. Just make a conscious decision either way.

3. Food

The average American household spends $550 per month on food. About ½ of that is for eating out.  Eating out is more for convenience and entertainment than a need. The other ½ is on expensive pre-processed foods. Food made at home costs ½ as much as grocery store prepared foods.  Consider growing a garden or buying from a local farmer’s market.  We all love the convenience and variety that restaurants provide.  Just consider the effect on your waistline and wallet.  Consider taking a cooking class.  You can use fresher and less expensive ingredients. The food can be made quicker, healthier, and tastier for 1/5 of the cost of a restaurant meal.  

4. Clothes, Grooming, & Fun

Do you have more “stuff” than you need or will use? Most of us do. One way to reduce the “stuff” is to move or pretend to move. You put it all into boxes. As you unpack, do so only when you need that item and leave the rest in the box. After one year, get rid of the boxes and everything in them. You can hold a yard sale or donate the items.

When considering a new purchase, consider if it is a need or a want. Either is fine, just don’t confuse the two. What is the item’s typical useful lifespan? What is the cost per use? You can figure this out by the formula: (initial cost – residual value when you are done with it) / # of uses (or # of years expected life of the item). Considering the annual cost may indicate that the cheapest option isn’t always the best option. Often it is worth paying extra for quality when it adds to the lifespan or helps maintain the residual (resale) value.

Rather than cut down on hundreds of items or dozens of categories it is much higher yield to focus on these big four. How could you avoid being penny-wise and pound-foolish by drastically cutting one or several of these expense areas?


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  1. Good advice WD. Saving is hard for most people. I live in a HCOL area with kids and I definitely feel squeezed. It’s a struggle and a work in progress. Housing, taxes, and kids education take the biggest chunks.

    November 5, 2018
    • I hear you, MD
      I was able to move to a LCOL area with some of the highest physician incomes. I guess it is now called “geo-arbitrage.” I realize that some folks need to be in a specific area or near family. It is worth it for many, but it is a high financial price that is paid.
      My approach to saving wasn’t really difficult. I “loosened my belt” a little after residency. Any additional money went to investments. It didn’t seem like a big sacrifice since I spend a little more each year for 20 years. It is just slow and gradual. Now the investment income streams have grown into raging rivers. That helps for sure.

      November 5, 2018
  2. Xrayvsn said:

    The best part about the process is that as you get further and further along your savings rate starts to skyrocket.

    As my passive income streams grew and my spending went down (after becoming debt free) my savings rate jumped dramatically and past 3 yrs have been over 70%. My net worth has taken an exponential looking course upwards bc of it

    November 5, 2018
    • Xrayvsn,
      That is an excellent point. I haven’t figured out how to articulate that well yet. But that is a key. When people see a savings rate of 50-70% they think of all the self-discipline and hardship that must require. Actually, I spend more every year and I have never felt deprived. I have always spent more than double the average person and still been able to grow my income, my assets, my passive streams, and my savings rate. It can be difficult to get that monetary flywheel spinning at first. Later it doesn’t take as much work and the output is more.

      November 6, 2018
  3. What a great article. I wish I had written it. I spend a lot of time with my coaching clients trying to get them to think differently. Think wealth not income. You summarize it nicely. You can keep a high savings rate if you start out that way. If you start out by spending all your money, then later want to have a high savings rate, you have all kinds of excuses as to why it is not possible. My house payment is just too high (easier to have purchased a less expensive house in the first place, than to downsize later). My kids “need” to be in private school (easier to stay in public school than to change back to public school)
    We saved 50% of our income in residency. When I became an attending, I just kept up with the same pattern. It was not a sacrifice. I did get a raise. I just didn’t spend it all. We spent just over one year’s salary on buying a house. You do not need to spend 4x your salary to get a good house. If we can all learn to live a little nicer than the average American instead of a little nicer than the average Physician, we would do a lot better financially.
    That was what prompted me to write The Doctors Guide to Starting Your Practice Right. If I could show young physicians how to get the right start when they leave residency and get their first good paying job, it will be a lot easier than having them try and back off of their high spending habits later.

    Dr. Cory S. Fawcett
    Prescription For Financial Success

    November 6, 2018
    • Wow. Thank you for the kind words, Dr. Fawcett.
      “What a great article. I wish I had written it.” is about the best praise I can imagine from a successful physician-author whom I respect.
      I agree that it has not felt like a sacrifice at all. I have spent a little more each year for about 20 years and so I still keep feeling “richer.” We live so far below our means that I was able to take large voluntary pay cuts on two occasions and didn’t even notice. I added slightly less to investing but that doesn’t matter after some point. The savings rate increases as the debt declines and income streams grow. It gets even easier over time. The book you mentioned is excellent for all doctors getting out of residency, not just those entering or starting a private practice. I recommend it along with your Debt Elimination Book.

      November 6, 2018

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