It’s Finance Fridays again… and I’m here to talk about making $400k/year and still be “broke”.

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My last post was about my Financial Living Will. As with most of my posts about finance I’ve talked about my philosophy, index funds, compound interest, etc.

But then I remembered that there are those who have been attendings for years. These individuals, even though they are making a lot of money, are still living month-to-month and are “broke”.

How does this happen?

It’s a slow bleed. It’s the reason doctors continue to pay financial advisors 1 or 2% AUM. They don’t feel it until it’s too late.

Even if you make $400k/year? But… how? 

Well, it’s many different things, but I think it’s better to just illustrate it rather than talk about it.

Let’s say you make $400k/year in California and just to make it easy, no allowances, and we won’t even consider 401k or HSA or anything.

That comes out to about $17,5000 a month after taxes. Make no mistake, that is a ridiculous amount of money.

Ok, so how do you spend > $17,500 a month?

It’s easier than you think.

Student Loans

This is a killer. If you have high ( > $350 k) student loans, which is becoming increasingly more common, then you will pay > $2000 a month in student loans if you pay them over THIRTY YEARS. If you try to pay them off over 15 years, then you will pay ~ $3000 a month.

So, $2000-3000 a month.

McMansion

The cost of a McMansion changes depending on where you live. However, in California, a McMansion will run you at least  $1,000,000. Since you’re a physician, you managed to get one of those physician loans with no money down straight out of fellowship. So you are financing the full $1,000,000 for 30 years.

Let’s say your interest rate isn’t even bad, let’s say they gave you 4%. They didn’t even make you pay PMI, how nice of them!

Your monthly mortgage is $4,774. So let’s just round up to $5000.

By the way, just so you know, you will pay $718,695.06 in interest over the life of the loan.

Second House

You bought a house during fellowship that you were planning to rent out afterwards. It was only $500k which you also got through a physician loan as a resident. Let’s assume 4% and no PMI again.

Your monthly mortgage is $2387. So let’s just round down to $2000. (to account for rounding up on the McMansion)

By the way, just so you know, you will pay $359,347.53 in interest over the life of the loan.

Helping Out

Your brother is a smart kid, but he’s a little down on his luck. So you’ve been letting him stay in your other house for free. He pays rent once in awhile, but you can’t really count on it.

Day Care and/or Private School

You have two kids and they deserve the best. They went to the best daycare/preschool in the area which was about $3000 a month for the both of them.

Or, if you prefer, they both go to private school which is probably at least $1500 a month each (so still $3000). I realize that some private schools can cost as little as $15000 a year, or as much as $40000 a year.

Either way, you’re looking at ~$3000/month.

Vacation Budget

You want to make sure you can take the family on vacation at least once or twice year, so this the one thing you budget for.Of course, you are the “rich doctor” in the family and want to bring the rest of the family along (Mom, Dad, Brother, Sister, Nephew, Niece, etc.) So you have to budget about $24k a year for this epic family trip.

So you save $2k/month specifically for this purposes.

CHECK POINT

So where are we then? If we add up the above, $2000-3000, $5000, $2000, $3000, $2000 = $14000-15000

Wait a second… $14000-15000 is still below $17,500, by about $2500-3500.

Well, we’re just talking about major expenses. Now you have to deal with other “normal” expenses:

You probably have two cars. However, you’re a “rich doctor” so only a BMW will do. Let’s say you are leasing two 340s for $400 a month, which is $800.

Then there is insurance — car insurance x2, house insurance x2, malpractice insurance, etc. (I hope you also have life insurance and disability insurance)  It’s tough to judge how much all the insurances will cost because they vary based on location and type of job. However, I think $2000 for all of the above combined is reasonable.

So of the $2500-3500 that was left… you have either -$300 or +$700 for the remainder of your living expenses….

We haven’t even touched upon groceries, fast food, restaurants, water, electricity, internet access, or other essentials. This also does not include saving money for retirement.

This is dumb Sensei. No one would do this.

I disagree, because I can name at least a few people that I know of that are doing exactly the above. Some of them are doctors, some of them are other “young professionals”.

What you need to understand is that this doesn’t happen overnight, it’s a series of decisions.

It’s like quicksand. “Hey, I have money and I can afford to buy stuff now.”

So you go ahead and lease those BMWs. You buy the McMansion. And let your brother stay in your other house for free. You also need to have that big family vacation at least once a year.

All of the sudden, you are actually in the red every month… but you don’t know it. Then your emergency fund evaporates and you don’t know why.

WHERE IS THE MONEY GOING?

If you’ve never budgeted, you won’t know. Every expense adds up.

Just your daily Starbucks Venti Pike is costing you $3 a day x 365 days = $1095/yr

You need to keep track of what you are spending. It’s kind of like the simple act of checking the nutritional labels on items you buy at the grocery store. Just this simple act alone makes you more aware of what you are buying and how many calories you are putting in your body. Just knowing how much you are spending will subconsciously curb your spending.

You need to prioritize where your money is going rather than just spending what you make.

Priorities should be in student loans and retirement, not in buying a McMansion, second house, or leasing expensive cars.

Expensive daycare/Private School is a personal choice, so I can’t really fault that choice too much. However, if you can live in an area with a good public school, that is obviously preferred.

Your vacation budget needs to be capped at something reasonable, and you really shouldn’t be paying for everyone in your family every year. If you feel you can manage it, then of course go ahead, but it shouldn’t be expected.

TL;DR

How much you make doesn’t matter.

If you spend every dollar of what you make, you’re “broke”.

This is more common than you think.

Keep track of what you are spending.

Prioritize where your money is going.

-Sensei

Agree? Disagree? Questions, Comments and Suggestions are welcome.

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