Dr. North and Dr. South – A Case Study on Wealth

Dr. North and Dr. South – A Case Study on Wealth

As many observers have noted, Americans tend to confuse income with wealth. If you have a high income, that makes you wealthy, right?

Let’s ask this another way: if you earn $500,000 a year, you’re rich, right?

Not necessarily, no. Even with such a high salary, if you spend $500,000 or more per year, you’re not rich. You’re broke.

Enter the story of Dr. North and Dr. South.

I tried to summarize the story of these two physicians for a friend, but I found it difficult to explain concisely. So, here’s the summary in written form – as thorough yet concise as I can be.

Credit to Thomas Stanley and William Danko, the authors of The Millionaire Next Door. Their research revealed this enlightening comparison of two high-earners in the 1990s.

Readers of The Millionaire Next Door will recognize this story. The story of these two doctors is not my favorite part of the book [my favorite chapter is called “Economic Outpatient Care”], but this particular tale is a brilliant illustration of the Millionaire Mindset.

The Doctors

At the time of their interviews with Stanley and Danko, Dr. North and Dr. South are both in their fifties. They are both married, with grown children (Dr. South also has a couple children who have not yet reached adulthood). And both men are highly-trained surgeons in an unspecified field of medicine.

Back then, the average American household had an income of $33,000. The average physician earned $140,000 per year. The typical physician who works in the same specialty as these men earns $300,000 per year.

Drs. North and South, however, are extremely high earners even compared to their highly-educated peers: each earned over $700,000!

Clearly, one does not reach such vocational heights without being both hard-working and intelligent.

But Dr. North and Dr. South are not equally intelligent about money.

The South family has a total net worth of $400,000. For most folks, that’s certainly a fair amount of money! Considering that we’re talking about the first half of the 1990s, that is an even more impressive sum, equivalent to roughly $700,000 in 2020 dollars.

But consider how much Dr. South earns. With a salary of $700,000, and being in his fifties, how much would you expect him to have saved by this point in his life? Certainly more than 7 months’ worth of his salary!

And, given that he lives in a nice home, it’s safe to assume that Dr. South doesn’t actually have $400,000 in cash and investments. Like many people, a large chunk of Dr. South’s net worth is tied up in the value of his house.

Dr. South’s retirement plan is therefore…well, a little behind schedule.

How about Dr. North? How much is his family’s net worth, according to Stanley and Danko? Try $7.5 million. That’s equivalent to over $13 million in 2020 dollars.

Same age. Same profession. Same salary.

So why the vast difference in wealth?

The answer is head-slappingly simple: lifestyle. Dr. South and his family spend money as though any leftovers will set their house on fire.

Dr. South just bought a brand-new Porsche, spending weeks calling every dealer within a 400-mile radius. Near the end of the month, he called dealerships on his short-list to ask for their “final lowest bid” for his patronage. The best offer came from an out-of-town dealer. Dr. South believes he’s a smart shopper, having paid “only” $65,000—close to the dealer cost.

How about Dr. North? Does he drive an old Yugo with a bumper that’s about to fall off? Hardly—he bought a 300-series diesel Mercedes, which was 3 years old when he purchased it for $35,000.

By the estimates of Stanley and Danko, Dr. South spent around 60 hours in an elaborate dance with these car salesmen, all to save a couple thousand on the price of a brand-new Porsche.

On the other hand, Dr. North spent only a few hours before purchasing a used Mercedes in great condition—in doing so, he saved a whopping $30,000.

Note the difference here? Dr. North takes a few hours to purchase a high-quality luxury vehicle. Few, if any, of his friends or colleagues would realize that it isn’t brand-new. This process takes, say, 10 hours and results in saving tens of thousands vs. buying new.

But Dr. South decides that he just has to have the brand-new model. So he dives in headfirst, playing a month-long game of Ring-Around-the-Rosie with a half-dozen dealerships, taking up 60 hours of his time and saving him only a couple thousand.

The two surgeons have opposite orientations—Dr. South treats car-shopping like a sport: I know exactly what I want, and I’ll wrestle everybody to get it. But Dr. North treats car-shopping like a chore: How can I make most efficient use of my time and money?

Dr. South, of course, likes to buy a new car every year. Dr. North, on the other hand, kept his previous Mercedes for 20 years before finally replacing it with this 3-year-old model.

Is car-shopping the only main difference between the two physicians? Oh, no.

The South family’s annual clothing budget was $30,000. Thirty-thousand dollars!!! Recall the income of the average American household at the time?…

Mrs. South frequents upscale stores like Saks Fifth Avenue, Neiman Marcus, and Lord & Taylor. [I’ve never even heard of that last one, but Stanley and Danko say it’s an expensive department store]. In fact, she has a store credit card for each of these, in addition to a gold MasterCard, preferred Visa card, and American Express platinum credit card.

Jointly, the Souths decided to buy a nice house with $107,000 per year in mortgage payments, and the Souths also decided to join a country club that took up $40,000 in fees and other expenses. And on top of all that, the Souths recently took a $7000 vacation. Of course, they don’t budget their other expenses, like groceries, either.

Essentially, they’re living lifestyles of the rich and famous.

Analysis

In isolation, none of these practices is necessarily a bad thing. Well, except maybe the lack of a budget. But clearly, somebody who makes $700 grand can purchase a $65,000 Porsche—as long as his other purchases are planned more carefully.

Again, a country club membership is well within reach for such a high earner. And it may have benefits, like expanding one’s professional network and gaining additional clients or customers (or, in the case of a physician, patients).

A pricy vacation may, in fact, help the hard-working Dr. South relax a bit. And, given that it’s only one percent of his annual income, that’s easily affordable.

No, the problem isn’t necessarily any one of these decisions.

The problem is the total of these decisions. Remember, budgeting is telling your money where to go—instead of wondering where it went!

Dr. and Mrs. North, on the other hand, lay out a budget—and follow it. They live a nice lifestyle, with an expensive home and a luxurious Mercedes. Stanley and Danko specify that the Norths’ lifestyle fits with a typical household with one-third the income. So, the Norths still spend approximately $200,000 per year—in the 1990s, no less!—which is nobody’s idea of frugality. (Except maybe the Souths…)

As you might guess, Dr. South grew up in a household with high-earning parents that spent money freely. The Souths now live an even more lavish lifestyle than Dr. South’s parents did!

But Dr. South suspects that his children, who have always been used to Dr. South’s free-spending ways, will struggle to generate a six-figure income on their own. Dr. and Mrs. South have unwittingly trained their children to live a high-consumption lifestyle. In adulthood, those same children will have three options:

• adjust their lifestyle expectations downward

• figure out how to earn more money

• trap themselves in an eternal game of credit-card roulette, and when that inevitably fails, beg Dr. and Mrs. South for money

Dr. South is no dummy. He could see the writing on the wall, and expressed concerns about this impending catastrophe to the authors during the interviews referenced in The Millionaire Next Door.

How about the adult children of Dr. North? They also grew up in a pretty plush environment—aren’t they also likely to find themselves trapped by their own impossible expectations?

In a word: no. Dr. and Mrs. North both grew up in thrifty middle-class households. They saw the wisdom of that system, and they adopted it for themselves. They make a plan for their money, and they stick to that plan. And their plan includes investing a sizable proportion of Dr. North’s generous salary.

That doesn’t mean that the Norths are selfish. Just disciplined.

As a general rule, wealthy people tend to give generously to charitable causes. Certainly not all of them, but many do. In fact, one of Dr. North’s 12 life rules, enshrined in a poster made by one of his daughters, is “Say yes to those who need help before they ask.”

Dr. North also says that he and his wife have set up trusts for their adult children, because “cash gives them too many options…What I have always told my children [is] if you need to make a major purchase, you must first fund a good bit of it yourself.”

Hmm…that insight sounds an awful lot like what billionaires know. Just saying…

As we can see, Dr. North advocates giving to those in need, and he even has gifts prepared (and held in trust) for his children. Clearly, he is nothing like Scrooge from Dickens’ A Christmas Carol.

Unlike the spendy Souths, the Norths preached—and practiced—restraint. And that’s the gift that keeps on giving, since the Norths are not only wealthy; they aren’t worried about the habits of their adult children.

And isn’t that the truest sign of wealth? Freedom from worry?…

Lessons

What lessons can we take from this tale?

You may be saying to yourself, “I don’t make $700,000, and I’ll never have enough money to buy a new Porsche! So what does any of this have to do with me?”

Extreme examples like this can highlight certain principles in ways that ordinary examples cannot. Because of the amount of money involved, it’s easy to see Dr. South’s mistakes. But it’s not always so obvious in our own situations.

Here are the lessons I take from this story:

1. Even intelligent people can be bad with money.

Dr. South is clearly smart and hard-working. But he is not so wise when it comes to his finances.

2. The key to success is discipline, not intelligence.

As Thomas Stanley (co-author of The Millionaire Next Door) pointed out in this blog post, they’ve interviewed a bus driver and a schoolteacher-turned-firefighter who have become multimillionaires!

These folks may or may not be smart. But they’re not high-earners with rare skills, such as the surgeons described here. These folks with ordinary jobs got to be multimillionaires by saving and investing, not by earning gobs of money.

3. Lack of discipline will come back to haunt you.

Dr. South is worried that the government will raise taxes or increase regulation. He’s worried about a decrease in his lifestyle. He’s worried that he won’t have enough money for retirement.

And, most ominously, he’s worried that his children will suffer from the shackles of debt and unrealistic expectations.

The theme here is worry. And Dr. South has a lot to worry about. His lifestyle is a house of cards that could easily be toppled by a brief gust of wind.

His lack of discipline isn’t just a gust of wind. It’s an oncoming hurricane. And the results will be predictably disastrous.

4. Income is irrelevant.

As I’ve identified before, M.C. Hammer made $33 million in 1991 alone. That’s far more than most Americans will ever make in their entire lifetimes!

But five years later, in 1996, he was $14 million in debt. That year, Hammer filed for bankruptcy.

If you just get that raise, or that promotion—then you’ll finally be able to save! Right?

Wrong.

There are always more ways to spend your money. If, like Dr. South, you don’t have a handle on your spending, the extra money from your big raise will soon be gone. Don’t believe me; just ask Dr. South. Or M.C. Hammer.

Control your spending, or it’ll control you.

5. Avoid lifestyle inflation.

Dr. South and his family spend just about everything they earn. Why? The short answer is: to feel wealthy and successful, and to impress other people.

Result: $400,000 net worth.

Dr. North makes about the same amount of money, but you wouldn’t know it from his spending. While he has nice things, Dr. North and his family act as though he earns much, much less than he really does.

Result: $7.5 million net worth.

It is very easy to slip into the habit of adopting the same lifestyle as other people—your peers at work, your friends, your neighbors, people you graduated with.

But you don’t know all the details of their situation. You can’t know. So adjust your expectations to reflect your own financial reality—not someone else’s.

Dr. South hangs around other big spenders. These big spenders probably have quite a bit more income than he does. A lot of them probably have more savings, as well. This doctor isn’t in the same situation as the people he hangs around. He’s either unaware, or refuses to admit it.

Dr. North, on the other hand, doesn’t live in the fast lane. And he truly is wealthy; much wealthier than Dr. South. You wouldn’t know it from outside appearances, but it’s true nonetheless.

If Dr. South knew how his net worth compared to Dr. North’s, he might be offended. But reality doesn’t care about anybody’s ego.

Dr. South appears rich and carefree, but secretly worries about his modest means.

Dr. North appears to have more modest means, but is secretly rich and carefree.

Perception is not reality.