Recovering From Financial Mistakes
There’s a fairly common phrase among doctors and other medical professionals when it comes to building wealth and that is “live like a resident”. Basically that means that once you finish your residency and get a nice attending job, continue to live the lifestyle you had during residency. Spend like you’re making resident money, and use the extra from your attending income to pay off student loans, put a down payment on the house you’ve always wanted, and maximize your retirement accounts. Doing this for just a few years will put you on a great path to financial independence. However, what happens if you weren’t aware of that maxim or heard it late? Let’s take a look at some ways to get back on track with one major tip as well as some smaller ones to get you thinking on how to make changes.
The big thing you’ll need to do is a perfect example of simple not necessarily being easy. When all is said and done and you’ve used every trick in the book, the answer is simple, you need to spend less. If you increase your lifestyle to match your new attending salary immediately then you likely haven’t given yourself enough time to pay off student loans, max out retirement options, and are slowly paying back the massive debts from med school. So, if you find yourself in your 30’s or early 40’s and still paying off student loans and struggling to build retirement assets then it’s time to take a long look at ways you can cut back on expenses. Again, I’m not saying this is easy as you’ve likely given yourself enough time to get comfortable, and it’s hard to make uncomfortable decisions.
It can be overwhelming to look at this situation and have a level head in determining where to spend less and what to reallocate those funds towards. Without getting too specific just yet, focus on the big parts first. You will need to dedicate significant chunks of your income to your retirement accounts to make sure you’re not trying to survive on social security alone in your 70’s. For those that still have student loans or auto loans, you will also need to work hard to clear those out which means putting another significant chunk of your income towards those goals. This means that in all likelihood you’ll have to reduce your lifestyle to what you were spending in residency for several years, which is harder after you’ve gotten used to a more lavish lifestyle, but is by no means impossible. For those of you who fall into this category, you’re probably wondering what kind of decisions you may need to make to tackle these issues, so we’ll look at few to give you a sense of what will be required.
There are a number of decisions you can make that will significantly increase your chances of reaching financial independence while you can still enjoy it, so let’s go over a few. This is by no means an exhaustive list and many may not apply to your situation, this is simply to give you a sense of the types of decisions that may be necessary to get back on track financially.
Higher Paying Job- This also sounds simple, but is likely not easy. Finding a higher paying job will allow you dedicate more income towards putting your financial health first and get back on track quicker. Perhaps it’s taking a partnership track job or adding some type of side hustle (with all that free time you no doubt have).
Decrease Housing Costs- Just like raising your income, lowering your expenses is a major component of this process, and it’s likely that a major source of expenses is housing. Whether that’s rent or mortgage and home improvements, reducing these costs can go a long ways towards having more money to pay off loans and put towards retirement.
Moving- Perhaps you’re wondering how to take care of a number of these things at once and you’re willing to do something drastic. If that specific situation applies to you then moving may be the right way to go. By moving to a new area, you may be able to find a higher paying job that places a higher demand on your services as well as find housing for less than you had been paying. There are also states that have lower taxes or no income tax or lower housing taxes. By moving to one of these states for cheaper housing, higher paying job, and lower taxes is the trifecta. This option is worth investigating seriously as it will greatly speed up the rate at which you build wealth if you do it right.
Budgeting- If you’ve skipped the live like a resident phase right after residency, it may be a good idea to take a serious look at your budget. If you don’t have a budget, then it may be time to make a budget so that you can take a serious look at something. This will help you identify areas where you’re spending money you don’t need to and help to reduce the expenses.
Cars- I’ve discussed the issues with buying too much car and trying to project image through the car you drive. If you’re concerned about reaching financial independence and you’re driving a luxury car, then downsizing it for something more modest is a good way to free up some money to put towards other areas of your life.
Vacations- Most people I’ve talked to have wanted to increase the amount they travel and want to see new places. Unfortunately, that can be a major expenditure if you’re taking a whole family to an exotic locale. It may be better to cut out the expensive vacations until you can get your finances back on track. There have to be sacrifices made to get on the right path unfortunately, and this is likely one of them.
There is no shame in not living like a resident right after residency and being able to recognize that changes need to be made requires taking a hard look at your life. Hopefully these give you some ideas to implement in your life, but if you need an outside perspective and someone to guide you along this process then reach out and I’ll be happy to work with you.