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Let’s talk foundations. In any effort to build, whether it be a great edifice or a great organization, we need a solid foundation. This is true for personal finance as well. Feel free to skim the below if some of this sounds really familiar. But, just like when I talk about sleep hygiene with patients, some of the concepts below may sound like common sense yet can be surprisingly difficult to do in modern day society.
DOLLARS ARE LIKE EMPLOYEES
Can’t recall where I first heard this concept (definitely can’t take credit for it – please message me if you know where it’s from!) but it’s a great framework. Think of every dollar you have like an employee. When you assign it a certain task, it will either leave your employ permanently in exchange for something (spend), sit patiently on standby and await further instruction (save in a chequing account), or go out and make more money for you (save in a savings account or investing). But you can only assign each dollar one task at a time, and with some tasks, you lose it forever (spend). So let’s talk about these tasks.
SPEND VS. SAVE
For the sake of clarity, let’s define “spend” as an exchange of dollars for a product or experience from which you are not likely to have further financial gain ( e.g. buying a new car, going on a trip, upgrading a cellphone). “Save” will be anything else.
Have you seen the skit, “You can’t fix stupid” by the comedian Ron White? One of the nurses I work with showed me this clip. She absolutely adores the guy. I will admit that the comedy style is less appealing for me, but the pithiness of the statement can be adapted in so many ways. Here’s a blunt one for finances. “You can’t out-earn stupid.” The follow up statement would be, “Spend less than you earn, and way less if you’re in debt.”
HOW MUCH TO SAVE?
Conventional wisdom says you want to save between 18-30% if you are aiming for retirement at age 65 and after (and an even higher percentage for earlier retirement). I find percentages a bit intriguing because this implies a floating standard for when someone decides they can retire, based on their current income (e.g. in this retirement calculator here). (Ironically, this retirement calculator doesn’t even go below age 50 for retirement age goals. Otherwise, I quite like it).
“Dr. FIREfly, let’s put your money where your mouth is. What percentage do you save?” Great question. Looking back at my 2017 data, I was investing approximately 32% of my paycheck over the course of the year, and that’s not including payments to my line of credit debt. Looking at the average saving (equivalent to investing, since whatever I could save, I invested) compared to income after the line of credit was paid off in full, my savings rate was approximately 47%. *pats self on the back* 2018 calculations are a bit out-of-whack due to some cash gifts this year. However, even with some very expensive trips, and some trips to very expensive places, my savings rate is approximately 41% so far. Still not bad. And this is even without feeling deprived or penny-pinching in any way. (For doubters, please refer back to 5th paragraph from the bottom of my first post). I will say, however, that I live in a part of Canada that is quite reasonable for cost of living. A.k.a., not Vancouver or Toronto, and I split rent with my husband (so it’s not even a 2-bedroom or 1 bedroom + den). It’s still possible to save while living in more expensive places (see this inspiring duo for instance, who were based in Toronto) and/or paying rent solo, but likely one would have to be even more intentional about evaluating spending and saving.
LIFESTYLE CREEP
But back to the the floating standard based on current income. Here, we return to the concept of lifestyle creep. If lifestyle creep is minimized, then earlier financial independence / earlier option for retirement is much more viable. There are some points at which those on the journey to doctorhood are particularly vulnerable to lifestyle creep.
- Getting into medical school “I got in! And have this huge line of credit! Free money – gonna treat myself!” *Spoiler: the money is not free
- Starting residency “Call me ‘doctor’ now! Getting paid – less than minimum wage considering hours worked, but finally! Only a few years left till I make that staff salary – time to live it up!” *Spoiler: unless you’re one of the lucky few, you have student debts to worry about first
- Starting as an early career physician “That was eight / ten / thirteen / fifteen / seventeen /…more… years of school after high school under my belt! Finally made it!” *Spoiler: unless you’ve saved well in residency AND had a great start in terms of amount, you still have student debts to worry about. (And possibly starting a family or buying a home, if those are things on your radar).
It also doesn’t help as you watch your peers spend and get shiny new tech/designer fashion/cars/houses/yachts/trains (I kid you not about the trains), your family gloats on your behalf about the nice house you’ll be able to live in, and/or your significant other says, “Relax, we can afford this!”
You can’t out-earn reckless spending, however. Dollars saved must be greater than dollars spent in order to build savings/investments. Savings and investments are necessary in order to be able to retire. Aside from Canada Pension Plan (CPP) and Old Age Security (OAS), physicians can’t count on any other sources of income in retirement other than what we’ve built up ourselves. There is no company pension plan. There are no health/vision/dental benefits aside from what you have purchased for coverage with private insurance.
So here’s what I suggest as general outlines for your dollar-employees:
- Take a real hard look at some of the mindless spending that can happen through a day. Spend on the necessities (of course, careful what is considered a necessity) and what will truly add value to your life (which is very individual).
- Debt. Pay it down. There are different kinds of debt with different degrees of urgency associated, which we will explore.
- Build a rainy day fund (known also as a “cash cushion”). The amount for this fund can vary depending on what stage in your career/life you’re at, and what risks you’re looking at covering your bases for.
- Invest. Having money in a savings account is a great start. Given the interest rates for savings accounts (even high interest ones) compared to the rate of inflation of cost of living, inflation will eat into what your savings are worth. Thus invest as early as possible. There’s a phrase of wisdom to know here: “It’s not timING the market, but time IN the market.”
In subsequent posts, we will examine each of these four pillars in more depth. Stay tuned!
-Dr. FIREfly, MD
