Doctors are notoriously thought of as being terrible at saving money. What many of them don’t realize is that it’s not only possible to live a doctor’s lifestyle while saving enough money for a fully funded retirement, it’s easy.
Doctors are among the highest earners in the United States. This allows them to achieve a higher standard of living while also saving enough money for retirement. To do so, they need to understand the steps involved in saving, which include identifying their current situation, managing debt, avoiding lifestyle inflation, budgeting, and automation.
Three Different Levels of Saving As A Doctor
Before I show you the 9 easy steps to saving money as a physician, I want to share the three different levels of saving. Doctors are well known as big spenders. Owners of fancy cars, expensive houses, and luxurious travel. But that’s not always the case.
The best way to measure your level of saving is to use what’s called your savings rate. This is equal to the percent of your take home pay that you set aside for savings and investment. For example, if you take home $100,000 per year and you set aside $50,000 for savings/investing and live off of the other $50,000, your savings rate is equal to 50%.
The traditional, spend-thrifty physician typically has a savings rate of less than 5%. Usually much less than that, and sometimes even negative. Then you have financially savvy doctors who save anywhere from 10-30%. Beyond that are the super savers, those doctors who are likely planning for early retirement by saving great than 50% of their income.
What do the three different levels of savings look like in actual numbers? Let me show you.
Let’s assume that each of our doctors takes home $200k after taxes. Every dollar they save gets invested into the stock market and makes 8% per year. What does each level of saving look like after 5, 10, 20, and 30 years?
| Doctor A | Doctor B | Doctor C | |
| Savings Rate (Dollar Amount) | 5% ($10,000/yr) | 25% ($50,000/yr) | 60% ($120,000/yr) |
| Year 5 | $63,359 | $316,796 | $760,311 |
| Year 10 | $156,454 | $782,274 | $1,877,458 |
| Year 20 | $494,229 | $2,471,146 | $5,930,750 |
| Year 30 | $1,223,458 | $6,117,293 | $14,681,504 |
Add on to this example the fact that most doctors don’t start their careers until at least age 30, meaning the chart represents ages 35, 40, 50, and 60, respectively. While having a million dollars when I retire at age 60 isn’t so bad, I’d much rather have six million. Or the option to retire early at age 50 with almost that same amount.
Which doctor’s saving strategy is most appealing to you?
Personally, I would argue that Doctor C has the right idea. That’s the path that I personally take, with a savings rate hovering around 70%. But I also think most doctors aren’t as aggressive as me and simply want to be able to retire comfortably. As it turns out, that’s fairly easy. Simply save and invest 10-30% of your income.
But if it’s really that easy, then why are doctors so notorious for being such poor savers? Is it lifestyle inflation? Expensive tastes? Entitlement? Or do they just not know how?
I believe it’s some combination of all of the above. But I also believe that every doctor has the ability to save enough for a comfortable retirement without making a major sacrifice to their current lifestyle. They simply need to learn how.
The Nine Easy Steps To Save Money As A Doctor
Step 1: Identify your current financial situation.
Before you can get where you want to go, you first need to understand where you currently are. Ask yourself these simple questions:
- How much money is in my bank account?
- How much debt do I owe?
- What is my current income?
- How much do I spend each month?
By answering these questions, you can establish a few things.
First, your net worth, which not only tells you where you currently stand financially, but it’s also an excellent tool to track your progress. Net worth is equal to your assets minus your debts.
Net Worth = Assets – Debts
For example, If you have $500,000 invested and $50,000 in loans, you net worth is +$450,000. Alternatively, if you have $10,000 in your bank account and $200,000 in student loans, that means your net worth is -190,000.
Sadly, most doctors find themselves with a negative net worth when they graduate residency. But don’t worry, you should be able to make it back into the positive in less than 5 years as long as you start saving.
The second benefit of step one is that you can get an idea of your monthly cash flow. Are you spending every dollar that you earn each month? Or is there some left over? If you don’t know how much you take home, it’s very difficult to determine how much you can afford to spend.
Step 2: Figure out how much money you need to be happy
Now that you know your net worth and your cash flow, the next step is to figure out how much you really need to spend every month to be happy. Is it more than your current level of spending? Are you happy with your current spending? Or would you be happy spending less?
If you’re starting this journey of learning how to save as a resident, you actually have a slight advantage at this step. Attending physicians may have already succumbed to lifestyle inflation and the hedonic treadmill. In other words, they’ve already increased their spending to a higher level, and once that happens, it’s hard to cut back.
Resident physicians, on the other hand, have already spent years learning to live on a lower budget and might only need a modest increase in spending to be happier than they were in residency.
There is no right answer to this step. Only you can figure out what level of spending makes you happy. Of course, If that number is higher than how much money you make, you won’t have anything left to save.
Once you figure out your monthly spending number, multiply it 12 and then subtract it from your total after tax income. That gives you how much money you can save every year. Dividing that by your total after tax income gives you your target savings rate.
Step 3: Create a plan for loan repayment
No physician savings plan is complete without accounting for student loans. The average doctor has over $200,000 in student loans by the time they finish residency. Sadly, these things don’t go away so easily. And they dramatically affect your ability to save money. You’ll want a plan to get rid of them.
There are two trains of thought when it comes to tackling debt. The first one says debt is good as long as the interest rates are low. The second says debt is bad no matter what. Let’s explain each
What if I told you that a bank would lend you money at 3% per year and you knew that stocks returned 8%? That means if you invested $100, by the end of the year it would cost you $3 but you would gain $8. A net gain of $5/year! Now imagine if you invested $200,000. You would probably want to do this forever.
That’s the mathematical reasoning behind holding on to your loans. As long as your expected investment returns are higher than the interest rate on your loans, you should come out ahead. And if you have multiple loans at different interest rates, you could target the highest percentage loans first to make this strategy even more effective. This is what’s called the avalanche method of loan repayment.
But maybe you don’t want to hold on to your student loans. What if you lose your job and can’t make your payments? Say, for example, if a pandemic happens and patient numbers drop. Or if your press ganey scores are too low. Or a family health emergency. Or maybe just the thought of having a $200,000 weight attached to your hip just doesn’t feel so good?
For a lot of people, paying off their loans relieves a huge mental burden. The psychological reasoning behind getting rid of your loans is exactly that. Pay off the smallest loans first to see them disappear. And pay them off as soon as possible. Also known as the snowball method.
Personally, I think any doctor should be able to pay off their loans in 5 years or less. But I understand why someone would hold on to them, whether for income based repayment plans or because of low interest rates.
Regardless, you need a plan to repay your loans. Whichever repayment strategy you choose, account for your monthly loan payments in your savings plan.
Step 4: Calculate your monthly bills.
I’m always amazed by doctors who don’t know how much they make. But I’m more impressed by those who don’t know what they’re spending it on. If you want to be good at saving money, you really should know what you’re paying for every month.
The first part of step 4 is simply tracking what you spend money on. How much is your rent/mortgage? What about your car payment and insurance costs? What are you spending on food? The goal here is to figure out exactly where your dollars are going?
You’ll probably be surprised when you do this. How much do you actually spend on things you need vs things you want vs things you just don’t care about? We’ll tackle that more in a second.
For now, add up all of your monthly bills. Then add in your monthly student loan payment. This gives you your total monthly costs. To make sure these costs leave some room for saving money, go to step 5.
Step 5: Create a budget
If the word budget makes you cringe, stick with me for a moment. No, I don’t think that everyone needs to track every single penny they spend for the rest of their lives. However, I do think it’s incredibly valuable to plan out your spending and see what actually happens. At least for a few months.
If you’ve already done steps 1-4 you’ve essentially created a budget plan anyway. In this step we’re just going to give it some structure.
Choose your favorite budgeting app. I used the app You Need A Budget (YNAB) when I was a resident, and I stuck with it when it changed to a subscription model later. You could also use Mint or any other budgeting app. Or if you want, just make an excel spreadsheet.
It doesn’t have to be complex. Just take your total monthly take home pay and divvy it up into your different categories. It just needs to look something like this:
| Category | Budgeted | Actual |
| Rent | $2000 | |
| Car | $500 | |
| Loans | $1000 | |
| Food | $1000 | |
| Saving/Investing | $5500 |
The huge benefit of a budget is that this is where you get to decide what is important to you. What you want to spend money on. Do you really want to spend $9/day on coffee? Or is a 10 cent iced coffee made at home better? Are you spending too much or too little on going to eat, groceries, and clothes?
Tracking your budget over time can be a very helpful tool to adjust your spending. And I encourage you to continue budgeting for as long as you need to. But now for, the goal is to get you started saving money.
If your budget lines up with the number you came up with in step 2, you should have more than enough to save at least 20% for retirement. If it doesn’t, use the budget to figure out your true happiness number and figure out how to meet your desired savings rate.
Step 6: Figure out your employer benefits
Before we get to creating an investment plan in step 7, I think it’s important to understand your employee benefits. Up to this point, we’ve been deciding what to do with your take home pay. How much to save, how much to spend, etc. What if I told you you also might qualify for extra tax savings and even free money?
Most physician employers offer some sort of retirement plan. The exact details of each plan are different, and I do recommend talking with your HR department to figure out the details of your specific plan. But the general theme is this:
Employers give you an incentive to save money by offering different types of retirement account. Typically, these are called 401k, 403b, or 457 accounts. The benefit to these accounts is typically lower taxes. Compared to a taxable account that you create yourself, your 401k can be funded with untaxed dollars and can potentially even grow tax free.
That’s huge. Especially considering the huge amount that doctors spend on taxes.
It’s important to note that you typically won’t be automatically enrolled in these accounts. You have to elect to do so. And decide how much to contribute. It can feel tricky and complex, but it shouldn’t be. Just follow these three steps:
- Talk with your HR department to get access to the account.
- Choose your investments (discussed in more detail later)
- Max out the account.
The current maximum for 401k employee contributions is $19,500. Divide that by 12 to get your monthly contribution, or $1625/mo.
That’s it. In those three steps you just lowered your tax bill, saved $19,500 per year, and got started investing.
But one more thing: Chances are your employer doesn’t just offer you access to retirement accounts. Most likely they’re also providing some sort of employer match as well. What’s an employer match? Pretty much free money.
For most people, the first step of investing is meeting their employer match. But because you’re maxing out the account anyway, you don’t need to stress those details unless you want to. Just ask your HR if there is a match, how much it is, and when it gets posted. Then check your account and see how you invested $19,500 for the year, but you actually invested $25,000.
Step 7: Create your investment plan.
In steps 1-5, I wanted you to better understand your current financial situation and develop a method to reach a goal savings rate of at least 20%. In step 6 I showed you how to save money and invest through your employer. Once you’ve done that, the next question is what you should do with the 20% that you saved.
On an annual take home pay of $200,000, a doctor saving 20% should have $40,000 per year to save and invest. I recommend creating an invest plan for this money.
Just like a budget, your investment plan doesn’t have to be very complex. The goal with the investment plan is to decide where your money’s going well before you actually have it in hand. That way, you’ll be less tempted to make snap, emotional decisions. Slow and steady wins this race.
Here’s a few things your investment plan should include:
- Achieve a target savings rate of 20% per year.
- Maintain an emergency fund of 3-6 months of expenses. Keep this in a high interest savings account
- Max out tax-benefitted investment accounts
- Invest the remainder in taxable accounts OR Use the remainder to pay off loans fast
- Create a target investment allocation of low cost index funds.
Seems simple enough, right?
We’ll dig into investment strategy and portfolio development in much more depth in another blog post. For now, I want you to understand two things. First, investing is risky and does not guarantee returns. I am not an accountant or a licensed financial advisor. You do invest at your own risk. Secondly, investing doesn’t have to be complex. At the most basic level, all you need to do is pick the simplest investment choice. A target date index fund. Like this one.
With an investment plan in place and a basic investment strategy, you’re well on your way to saving money and doing it right.
Step 8: Automate everything.
By now you know the basics of saving money and investing. In this step, I’m going to show you how to make it even easier.
Automate everything.
One of the things that makes saving money as a doctor really tough is that you entire paycheck goes into your bank account. Once you’re an attending, you’re suddenly seeing $20,000, $30,000 or even more in your bank account. If you’re opening that account every time you pay a bill or make an investment choice, you’re going to be tempted to spend it.
“Why not buy that $2,000 bike? I’ve got 20 grand sitting in my bank account. I can afford it,” you might say.
And you’ll probably buy that bike. Or that car. Or whatever else. That’s how you become a spendy “rich doctor”.
To keep yourself from making that mistake, automate everything.
You’ve already made automatic investments when you signed up for your employer sponsored accounts. Now just do it with everything else.
Before you ever spend a dollar on your bills, set automatic transfers to your investment accounts. Pay yourself first. Then, set up bill pay with your bank and set it to pay your monthly bills. Mortage, car payment, disability insurance, etc.
Now, when you check your bank account, you won’t see $20,000. Instead, you might have $4,000. That doesn’t mean you only have $4,000. It just means you only have that much left to spend. Would you still want to impulse buy a $2,000 bike?
Another extra bonus to automating your finances is never getting another late fee. Because you’ll never forget to make a payment. And oh man! Late fees are a total drag. Especially when it comes to credit cards…
Step 9: Get a credit card. Discount everything.
The ninth and final step to saving money as a doctor is this: Get a credit card.
You might have heard that credit card are bad. That the credit card companies are evil and out to rip you off. And to a lot of people, that might be true.
But not to you. Now that you’ve mastered your savings, figured out your spending, and automated your finances, you’ll never pay another credit card bill late. That means no late fees. That means no interest.
Instead, you get all the bonuses of credit cards. Sign on bonus miles and cash back. 3% points on all purchases to travel miles. Or even 2% cash back on everything.
Plus just having a credit card and making payments on time helps you build credit, which will absolutely help you when it’s time to buy a house or refinance your loans.
I’ll dig deeper into the differences between credit cards and helping you find which one is best for you. But now for, just know that to the doctor who’s good at saving money, credit cards are a huge benefit.
Final Thoughts
There you have it. How to save money as a doctor in nine easy steps. If there’s only one article you read about personal finance, I hope it’s this one. Simply following these steps is enough to get you out of the model of the spendy, “rich doctor” and become the wealthy doctor well on their way to a comfortable retirement.
Of course, there’s a lot more to personal finance. A lot more that I want to share with you. Tips and tricks and little nuances to help you better understand and manage your finances. But for now, these are the basics.
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