Wednesday, September 7, 2016

Do Doctors Earn Enough?

Do Doctors Earn Enough to Make Ends Meet?
Or, The Very Definition of Lifestyle Inflation

We all know that physicians must go through many years of expensive schooling, as well as grueling residencies and tough exams, before being certified to practice medicine. And, once they finish this long ordeal, doctors finally begin to make generous salaries upwards of $200,000 or more every year.

But, considering the onerous burden of student loans and the relatively short careers (thus impairing their lifetime earning power), are these salaries actually enough for doctors to make ends meet?

Passive Income, M.D. posted an article here about why many physicians, with an income of $250,000 or more, live from paycheck to paycheck. The point of this article was that, in Southern California (a notoriously expensive part of the U.S.), it's understandable if doctors with a $250,000 salary are living from paycheck to paycheck.

I like to think of myself as a reasonable person, so I could imagine that the argument might actually hold some water. But after taking a look at the spreadsheet on the full article, I was absolutely furious!

Here's the offending document!
To view this spreadsheet in context (including Dr. Passive Income's fiscal assumptions), see link above.

The good doctor's website,, has a blurb rather than the full article--but, more importantly, it has a comment section! This very post was born from a comment that I left on that blurb.

So, contrary to the point that Passive Income, M.D. was making, I will argue that the $250,000 salary given in the example is plenty to live a luxurious lifestyle--even in one of the country's most expensive regions! For ease of reference throughout this post, I'll call the example doctor in the above spreadsheet "Joe." Here's what's wrong with Joe's choices, and how to fix them: __
1) Vehicles

$800/mo. for a car--or even for multiple cars--is just silly for someone who's having trouble making ends meet! This is likely the result of leasing, or making payments, on at least one brand-new luxury car. A BRAND-NEW Honda Accord Sport, with an MSRP of about $25,000, would cost $450/month. Buying a three-year-old Accord with under 50k miles would give you a $10,000 discount on that purchase price.

If Joe feels the need to get a luxury car to fit in with his peers, he could get a six-year-old midsized Acura, Lexus, Mercedes, or BMW for about $15,000 or less (and those prices hold for Los Angeles--I checked!).
How many of Joe's overworked colleagues would notice that this 2010 Mercedes-Benz C300 isn't actually new? Or that it costs $15,000 instead of $40,000 [the price of a brand-new 2016 C300]?
Joe should easily be able to get himself a decent, reliable, 5 (or less) year-old used car that fits his taste. Same for his nonworking spouse--and since Joe's spouse doesn't work (as Passive Income, M.D. assumed in the example), then he or she definitely doesn't need a new car!

Showing off with a fancy car is a luxury that's reserved for people who have more money than they know what to do with. As Passive Income, M.D. illustrated, Joe is having trouble living within his means--so he's clearly not in that category. If Joe's peers ask why he's not driving a new Benz, he should reply that he'd be happy to buy one--just as soon as they pay his other bills for him! But the reality is that Joe's colleagues are probably too worried about what others think of THEM, to take any more than a passing notice of what Joe is driving. A car is a depreciating asset. You need a brand-new car like you need a hole in the head. Buy used, and let someone else take the depreciation hit! __
2) School

Private school?! Judging by how much Joe is paying for that house, he's not exactly living on the mean streets. I realize that Cali has insane real estate prices, but I think we can still assume that this is a decent home in a nice neighborhood. It's likely that the public school is just fine. In education [as with most things in life], you get out what you put in. Joe can send his kid to a private school to get a great education, but let's be honest--Junior is probably more worried about getting likes on Instagram than about learning what date the battle of Antietam occurred. The ancient words from Proverbs 17:16 hold true in all times and places: "It is senseless to pay to educate a fool, since he has no heart for learning." (There are a variety of translations. This version came from the New Living Translation. I also like the translation in the Complete Jewish Bible-NIV) Unless there are regular gang fights at the local public school or some other circumstance that prevents Junior from being safe in public school, there's no really good reason to send that child to private school. Joe is paying twice for Junior's education: once with his taxes, and again with his private school tuition. If Junior is doing well in private school, he will also do well in public school!

And in my observations, private high schools often breed a sense of elitism--not achievements. The private school kids who go on to become wealthy and successful probably would have done so if they went to public schools, as well. The intelligence, drive, and grit that contribute to success won't be brought out by tuition dollars, but by parents and teachers who care. To achieve their highest potential, children need both high expectations and parent/teacher support. Plenty of public-school teachers care about their students (as well as plenty who don't). The same is certainly true of private-school teachers, as well. So, is it really worth the annual $15,000+ in tuition to shield your child from contact with the working-class riffraff like me?... Oh, and that garbage about Ivy League placement rates in private high schools is nothing but marketing B.S. The son of a U.S. President or Fortune 500 CEO is going to be admitted to Yale/Harvard/Princeton, regardless of his scholastic achievements (or lack thereof). That same student went to a private high school first--and, of course, the private school will happily take credit for this student's "accomplishment." The main advantage of Ivy League schools really lies in their connections to other wealthy and powerful families, rather than in the education itself. There are very smart people (and excellent teachers) at colleges and universities all across the country; someone who really desires a good education will find one. As a PhD student with exactly zero ancestors who've gone to college, I'd know. Worse than sending Junior to a private high school [presumably--the "advantage" of a private school is even less pronounced for elementary or middle school] is sending Jane the preschooler to a $1200/month preschool. I guarantee that Jane isn't learning anything that would justify that kind of payment! Joe is paying $1200 per month to send a 5-year-old child to take naps, eat snacks, and play!!! Remember that the spouse in this example is not working--why not? If Junior is in a private high school, Jane is in a preschool, and there's a $120/month item for house cleaning, that begs the question--what IS Joe's spouse doing every day? Taking the kids to school and picking them up? Using that $80/month yoga membership (which, remember, is independent of the $80/month gym membership)? Sounds like Joe's spouse is a pretty expensive cab service... The preschooler can nap, have snacks, and learn from a stay-at-home parent--all for free! $1200 a month is an awful lot of money to get Jane "accustomed" to leaving home for part of a day--which is exactly what she will do in kindergarten (for free)! Again, note that sending your kid to a public school costs nothing [beyond taxes, which you'd have to pay anyway]. And I doubt that there are a lot of dangerous gangbangers running around SoCal kindergartens, so there goes that justification...

3) Insurance

With a cheaper car will come cheaper car insurance. $250/month is pretty high. I'd say that you can conservatively knock off $100/month for the used cars I'm suggesting. If Joe's nonworking spouse drives a less ostentatious car than Joe's Benz pictured above, this $150/month car insurance item allows for $95 coverage on Joe's car, and $55 for the spouse's cheaper vehicle. Also, $100/month is a lot for life insurance. A common rule of thumb is to "buy term life insurance and invest the difference." Here, 'the difference' refers to the difference in the monthly premium between term life and another option, like whole life insurance. I agree that this approach of buying term life is often a good policy (if people follow it--unsurprisingly, surveys show that they often don't).

The whole purpose of life insurance is to pay off your bills in the event of the primary breadwinner's death, is it not? After all, what's the point of leaving an insurance policy to a surviving spouse if they don't have any major bills to pay? Just keep the money [or, rather, invest it], and you will make the compound interest, instead of the insurance company! Get term life up to age 50 or 55, at which point you've probably paid off the mortgage and student loans, and your kids are out on their own. This method provides a good bargain, because your family is covered for the time at which it is most vulnerable --but you're only paying about 1/10 the monthly premium for term life (vs. for whole life). Instead of paying $100/month, Joe would pay something like $10 or $15 per month for term life. __

So, if "Joe" followed my advice, he would save $2867/month by not sending Junior to private school or Jane to preschool. He'd save $85/month by switching from whole life insurance to term life, and he'd save about another $100/month in car insurance by driving older (but still nice) cars. This savings amounts to $3052/month, which brings Joe's expenses from $15,848 down to $12,796. This would put Joe under budget (unless he's paying a 40% effective tax rate, in which case he probably needs a better CPA to find him some tax breaks). I could also quibble with the fact that Joe is paying $80/month for a yoga membership AND $80/month for a gym membership (again, why pay for something twice?! If that gym costs $80 a month, it BETTER offer yoga classes as part of the membership...), or that house cleaning costs $120/month, but I've chosen to turn a blind eye to these expenses. Joe is choosing to maintain such an extremely high standard of living in such a desirable area of the country, and then running himself ragged to earn extra money to cover the costs of this choice! Running himself ragged like that, by the way, negatively impacts the quality of care for his Joe's inflated lifestyle is hurting himself, which ultimately hurts others--all just to keep up with the Joneses.

As Passive Income, M.D.'s spreadsheet stands, Joe's family has the following luxuries:
-only one working parent
-two nice cars; at least one is a brand-new luxury car
-private school for the older kid and a hideously expensive preschool for the younger one
-peace of mind from the disability, life, and umbrella insurance
-ownership of a house in beautiful SoCal...
-...& a cleaning service to keep it tidy
-cell phone service for the entire family

This results in Joe's high level of stress about his finances, as he's operating at a monthly shortfall--despite his quarter-million dollar salary!

If Joe wanted to maintain this very high standard of living, I'd advise him to replace any new cars with late-model, low-mileage used replacements. The used cars can (and should!) still be comfortable and reliable; they just won't have the new car smell. I'd also cut out the private school bills and lower a couple of other bills, as described above.

This would leave Joe and his family with:
-only one working parent
-two nice cars; both are used
-peace of mind from the disability, life, and umbrella insurance
-ownership of a house in beautiful SoCal...
-...& a cleaning service to keep it tidy
-cell phone service for the entire family

Not much of a dropoff, is there?

The real plan

What I'd actually recommend, if Joe wants to live a less hectic lifestyle and truly enjoy the fruits of his studies and labor, is to buy a more modest 2-bedroom house (or, for maximum peace of mind, rent instead). This will save mucho dinero, every month! It would be easier for Joe to do this if he didn't live in SoCal, but I'll assume that he and his family will want to stay in the same area.

Joe should also buy those used cars outright (No monthly payments?! gasp!), ditch the private school and preschool, cut the yoga membership (why do they even have this again?!), join a more plebeian gym that costs a quarter of the $80 monthly that he's currently paying, and ditch the house cleaner. Oh, and pay less for insurance, as mentioned above.

I've made a new spreadsheet for Joe:

With my recommendations, Joe and his family are still living a luxurious life--but coming in well under their monthly budget! This surplus would allow Joe to make a generous monthly investment in his retirement portfolio.

And, please note the size of this surplus even after I included lines that Dr. Passive Income overlooked--namely, 'Utilities' and the all-important 'Miscellaneous.' By following my plan, Joe will have some money for internet, cable, CPA fees, and birthday/holiday gifts for his family! And his wife still gets to stay home with the kids!

If Joe is wise, he'll stop reading my article and hightail it to the car dealership! After he exchanges those overpriced new cars for good used ones, Joe's next move should be to call his real estate agent and put his house up for sale, and start looking for a smaller house (whether he's planning to buy or rent).

Hey, I'm an expert at living on less! After all, in one month, this fictional doctor earns--after taxes--about as much as I make in a year (before taxes)! So, let's just say that I won't be losing any sleep over Joe's self-induced predicament...