Physician: What Are Your Assets?

With all the concern over the economy and the changes in health care, I thought it would be a good idea to write just a quick post about financial assets.

Most physicians do not understand the concept of financial assets and wonder why they feel like they are working harder and faster for less and less reward.  

Now, I want to be clear, I am not a financial expert or a wealth manager.  However, I have found a few principles that have really helped me personally, so I though I would pass them along to the readers of Freelance MD.

First, it needs to be said loudly and clearly that when a physician first graduates from his or her residency program, they have not "made it" in the financial sense.  Yes, graduating from residency is a great achievement and does signify the completion of a long, difficult training period.  It also usually is accompanied by a significant increase in salary and the ability to live better and spend more.

However, in the financial sense, a newly minted physician is in a horrible financial place.

Most physicians finish residency with significant debt, debt that is made worse due to the young physician's new salary, a salary that places the physician in a tax bracket that precludes the interest on student loans from being tax deductible.  

Next, most physicians have little financial training so they immediately "reward" themselves for all the years of focus and discipline with a "few" nice things.  I clearly remember many resident friends of mine who bought expensive luxury cars and nice homes immediately after graduation.  Since few residents have significant savings, these new physicians simply added to their significant student loans even more debt in the form of car loans and large mortgages.

The problem with all this is that the new physician is suddenly saddled with enormous overhead.  His or her lifestyle looks nice, but at the end of each month very little money goes to savings or retirement or investing in other financial assets that could help increase their overall net worth.  Even those physicians who are aggressive about paying down debt and funding retirement often do not rise as high as they could financially because they make the mistake of pouring their disposable income into items that they believe are assets but actually are liabilities.

Robert Kiyosaki, author of Rich Dad Poor Dad, has produced a couple of very short informational videos (around 2 minutes each) that summarize the issue of assets.  The true definition of an asset is something that makes you money.  While this seems obvious, it is often misunderstood.  For instance, many physicians consider their homes and their cars "assets."  Strictly speaking, these items are not assets since for the most part they take money out of your pocket.  

Here's a short video of Robert defining a true asset:

Make sense?

For an item to be a true asset it needs to produce cash for you.  

Physicians work very hard and make a good salary, but most take their disposable income and instead of using it to buy assets, they pour it into items that actually increase the outflow of money from their pockets.  If the physician hits a snag in his/her career-- illness, salary decrease, burnout-- they suddenly realize how fragile their financial world really is.  Without true assets putting money each month back into their pockets, these physicians realize they are simply highly-paid hourly workers who are forced to exchange time for money indefinitely if they are to survive.  This realization is a very depressing concept, and one that I believe significantly contributes to the frustration of many physicians today.

To break out of this cycle, a physician absolutely must understand the principle of investing in true assets with their disposable income so that they begin to slowly wean themselves off of the dependence of their physician salaries.  In the end, a wise physician will have lived frugally, paid down debt, placed money in retirement, and instead of buying "toys" with their disposable income, instead slowly built up a collection of assets that put money back into their pocket and made their physician salary superfluous.  Ideally, a physician will eventually reach a point where their living expenses are covered by the income from their assets and their salary as a physician becomes simply the "icing on the cake" so to speak.  Perfectly executed, this freedom from the time-money continuum allows a physician to see their careers as something they choose to do for whatever reason-- desire, interest, altruism, curiosity, etc...-- not something they are forced to do to continue surviving.  It truly is a life-empowering shift in perspective.

So what are some examples of assets?

Again, Robert Kiyosaki succinctly describes the three broad categories of assets in the following video:

I hope this all makes sense and you're beginning to get a vision about how you can begin breaking free from the time-money grind through the purchasing and development of true financial assets.  In future posts we'll go deeper into this subject, and  at our Medical Fusion Conference we'll also be explaining these concepts in more detail.

Comments

[MD]

Makes sense, but risk is involved. This is especially true for non market investments like real estate, business, etc. A lot of these investments fail and require great work. You have to have millions in a market portfolio in order for it to passively pay for the average physicians lifestyle. Millions is not something most physicians can achieve, especially with the cuts to reimbursements facing many specialties. Seems to me like I am trapped in this field until I am at least 55 or 60 assuming the markets do well and the government does not butcher my reimbursements to primary care levels. Really sad how after only 5 years of practice, I feel this way. I certainly was much more idealistic going into training.

[Dennis]

All doctors should have some real estate in their portfolios. While all investments have some risk, I disagree with the above comment about the risk in real estate. Compared to other assets, apartments are low risk if you know what you are doing, or you hire someone who knows what they are doing. Shelter is a basic need. Also, banks will loan up to 70% - 80% of an apartment's value for you to buy. Try asking Bank of America to loan you 70% - 80% of the value of their own stock for you to buy. They will loan on real estate and not stock, because real estate is inherently less risky. The real risk in real estate is investor ignorance (buying the wrong property, buying in the wrong market, buying for the wrong price, hiring the wrong manager or managing yourself). I invest in apartment buildings in the best markets in the country using an experienced asset manager with a proven track record. In this way, I can get double digit returns with little risk and no management burdens. I agree with the above article. Real Estate (especially large apartment buildings) are excellent assets that when done right can put you on the fast-track to retirement.