Why to Invest as a Resident and How

So, I overheard an intern the other day explaining to another intern why investing in a retirement account right now doesn’t make sense because, and I quote, “I’m already broke enough. I need any extra cash I can get my hands on right now.”
I get it. I, too, was once a broke intern, and now I am a slightly less broke PGY-4. This blog post is dedicated to the both of us and everyone in between.

Let’s start with some disclaimers:

Disclaimer #1: Money isn’t everything. None of us went into medicine solely for fat pockets. “If we wanted to be rich, we would’ve worked on Wall Street”. We’ve all heard this. However, we’ve all worked pretty darn hard, and the salaries we will inevitably gain might as well be managed deliberately and intelligently.
Disclaimer #2: I am not a financial advisor. I am a fourth-year EM resident, under-represented minority in medicine, product of a very unwealthy, humble single-parent home. One of my life goals is to create generational wealth for my family. What you read in this post is some information that I believe may be helpful for me to meet that goal and likewise may be helpful for you to achieve similar goals.

Let’s move on to some facts:

Fact #1: 70% of millionaires never average six figures during their careers [4].
Fact #2: 30% of millionaires never make six figures at all [4].
Fact #3: The average U.S. physician has an annual income of $318,000 dollars [6].
Fact #4: 25% of U.S. physicians have under a million dollars by the age of retirement; 12% have under $500k by retirement [6].
Fact #5: Physicians make up only 6% of U.S. millionaires [1].
Fact #6: Entrepreneurial business owners make up more than 50% of U.S. millionaires [1].

Now one important distinction:

Income does not equal wealth, as you might surmise from the above facts. Wealth is how much money you would possess (minus any debt) if your income suddenly stopped. According to Drs. Thomas Stanley and William Danko, authors of The Millionaire Next Door (highly recommended), your expected wealth can be determined using the following formula:

[(Your Age) x (Your Realized, Pre-Tax Income)] / 10

It’s a useful formula for people who don’t routinely go into hundreds of thousands of dollars of debt prior to making a salary, but for us physicians, a more appropriate formula is required. Thankfully, Dr. James Dahle, author of The White Coat Investor (also highly recommended), created this formula to help us determine how much our expected wealth should be as physicians:

[(Your Salary) x (The # of Attending Years You’ve Been Practicing) x (0.3)] – $200,000

If your actual wealth is higher than the number you calculate, you should consider yourself a Prodigious Accumulator of Wealth (PAW). Your saving and investing tends to be greater than your spending.
On the other hand, if your actual wealth is lower than the number you calculate, you should consider yourself an Under Accumulator of Wealth (UAW). Your spending tends to be greater than your saving and investing.

Now, an unfortunate fact and a secret:

Fact #7: For every one PAW physician, there are two UAW physicians [1].
Secret: It really isn’t that difficult to become a millionaire (see why here).
Most physicians have a career length of about 30 years making an average salary around $300k, and a quarter of them still don’t manage to reach a net worth of a million by the time they retire. Now there are many complex and simple reasons (here, here, and here’s some more) why the amount of UAW physicians outnumber the amount of PAW physicians, but my goal here is to focus on one of these simple but significant reasons. It’s the same reason why entrepreneurial business owners tend to make up over half of all American millionaires. It isn’t income. It’s habits.
Planning, Saving, Investing. These are the habits that differentiate UAWs from PAWs.

Planning:

Fact #8: PAWs allocate nearly twice the number of hours per month planning their finances compared to UAWs (8.4 hours vs 4.6 hours per month) [1].
I don’t want this fact to be skimmed over. This was discovered after Drs. Stanley and Danko studied and compared a equally-sized cohorts of PAWs and UAWs. What’s most alarming is that despite all of these people having around the same actual annual income, the PAWs had an average net worth over 5x the average UAW net worth. Planning matters a lot.

Planning includes:
• ♠deciding on a budget strategy and diligently following that budget strategy (try using an app).
• ♠deciding on a savings goal for emergencies, short-term goals (travel/recreation), and long-term goals (retirement/home/kids).
• ♠deciding on an investment strategy and diligently following that strategy.

Keep in mind, this is a simplification. There are many nuanced strategies and components to creating financial health and wealth for physicians that I simply do not have the time to touch on in this blog post. For a more comprehensive explanation of strategies behind financial planning for physicians, please see further reading below and check out the online White Coat Investor Blog.

Saving:

How much money should you be saving? This number is variable and unique to each individual’s situation and will likely be dependent on the type of budget strategy that works for you. In general, it should be around 20% of your pre-tax income. It should be used to maintain an emergency fund, as well as a small cash cushion for short term things you might want to be able to do (travel, vacation, concerts, etc), and should go towards longer term personal/family goals (retirement, home ownership, etc) – although, much of this long-term savings should be invested, as we’ll talk about in the next section.

Investing:

Saving is essential, but investing a healthy portion of that savings is truly the key to growing wealth. Your savings should meet your individual emergency fund goals and short-term cash cushion goals, however, locking any further savings up in a low-interest rate savings account comes with the missed opportunity to put those extra savings to real work through relatively higher interest investments.

Fact #9: UAWs are nearly twice as likely to keep their money in cash or savings accounts, whereas PAWs are more likely to invest their money in vehicles that tend to appreciate in value (stocks, index funds, exchange traded funds (ETFs), real estate, retirement accounts) [1].

Investing your money gives that money the ability to grow substantially on its own, and because of the principle of exponential growth, the earlier you begin investing your money, the greater the potential for growth. And even more importantly, because we are creatures of habit, the earlier you train yourself to budget money for investments, the more likely you are to develop an investment strategy that you are comfortable with and will actually carry over into your attending years.

Okay, let’s say you’re convinced: you’re interested in planning ahead, budgeting out your expenses, saving for an emergency fund and cash cushion, then using any extra savings for long-term investments. The only problem is you’re a broke resident. The bottom line on your budget is rather unimpressive, leaving you with only a measly amount of money after expenses. Is it even worth it to invest a small amount of money? Is it even feasible?

Remember, the reason why entrepreneurial business owners tend to be PAWs isn’t because of their income, it’s because the same frugal mindset they need to have with their businesses tends to get applied toward their personal finances as well – it becomes a habit. Part of the goal of investing even a small amount of money is simply to develop the habit of investing now so that when that physician income starts coming in, the habit is already second nature. Figure out how to invest a small amount of money now, so when you can afford to invest a larger amount of money later, you will be better at it.

The question of feasibility might have been an issue a decade or two ago when in order to buy a stock you needed to go through an official broker and an individual stock might cost you a thousand bucks; but in 2021, the options for investing even small amounts of money are pleasantly simplified.

Aside from taking advantage of whatever retirement contribution plans your employer may offer (free money), today there are numerous free downloadable apps with minimal to no fees that allow you to open up taxable accounts and/or retirement accounts through which you can buy and own fractional shares of public companies, index funds, ETFs, bonds, commodities, and even real estate. This means that instead of having to buy one whole Google stock for $2,000+ bucks, you can invest $20 dollars, own a fraction of that same Google stock and watch that $20 dollars grow with the same percentage that the full stock ownership would. If $20 dollars is too much, you can get fractional shares for $5 or even less. Remember, the goal at this point is less about how much you are investing, and more about you forming the investing habit. Investing even a small amount of money puts your skin in the game and forces you to actually master investment principles, study the difference between an index fund and an ETF, acquaint yourself with market psychology, learn the importance of diversification, understand the advantages of a Roth IRA vs Traditional IRA, and so on and so forth.

Here is a link to a great review of solid investment apps available for download, and here some general principles to keep in mind before you embark:
• ♠The goal is investing, not trading and not speculating. Choose an app where the focus is on holding and continually contributing to an investment as opposed to trading whatever’s currently hot in the market. (Fact #10: over 90% of U.S. millionaires hold all their investments for more than a year [1].)
• ♠Use an app that will allow you to use or open retirement accounts like a Roth IRA. Using one of these accounts forces you to think long-term in your investment decisions and also allows you to take advantage of the many tax benefits that come with them.
• ♠Look for an app that allows for fractional shares, so that any extra savings you might have (no matter how small) can be put to work.
• ♠In general, you should be paying little to nothing for fees – these eat into any returns you might gain and with the options currently available, they’re frankly unnecessary.
• ♠Choosing individual stocks and funds can be overwhelming when starting out, Robo-advisor apps (ie. Acorns, Betterment) can be helpful since they can create diversified portfolios of various stocks/funds for you to contribute to gradually over time. Just be wary of fees, especially when there are other more hands-on apps that allow you to contribute to “lazy portfolios” or pre-made diversified portfolios which will work in much the same way (ie. M1).
My personal favorite investment application is M1 (here’s a review). Shout out to Dr. Benjamin Weissman for putting me onto it while we were supposed to be ultrasounding patients. Before this, I used the ever-so-popular Robinhood. The reasons I switched are many, but briefly, it fulfills all the principles discussed above and has allowed me, a broke resident, to build a long-term oriented and diversified investment portfolio that has genuinely helped me mature my personal investment philosophy with relatively little funds.

A final thought:

Medicine should certainly be the main thing you study during residency, but it shouldn’t be the only thing. The goal should be to become medically/culturally competent, badass physicians who are also financially intelligent and independent PAWs.

Further Reading (must-reads, in no particular order):

• The Intelligent Investor by Benjamin Graham
• The White Coat Investor by James Dahle, MD (also explore the online blog version)
• The Millionaire Next Door by Thomas Stanley, PhD and William Danko, PhD

References

[1] Stanley TJ, Danko WD. The Millionaire next Door: The Surprising Secrets of America’s Wealthy. MJF Books; 2003.

[2] Home – white coat investor. Whitecoatinvestor.com. Published October 11, 2015. Accessed October 7, 2021. https://www.whitecoatinvestor.com

[3] Physician millionaires. Whitecoatinvestor.com. Published July 17, 2020. Accessed October 8, 2021. https://www.whitecoatinvestor.com/physician-millionaires/

[4] Hogan C. The National Study of Millionaires: Findings from the Research Study behind Everyday Millionaires. Ramsey Press; 2020.

[5] 9 Charts Showing Why You Should Invest Today. Usnews.com. Accessed October 8, 2021. https://money.usnews.com/investing/investing-101/articles/2018-07-23/9-charts-showing-why-you-should-invest-today

[6] Medscape Physician Wealth and Debt Report. Medscape.com. Accessed October 8, 2021. https://www.medscape.com/slideshow/2019-compensation-wealth-debt-6011524