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Jeff Anzalone, otherwise known as Debt-Free Dr has been a personal favorite blogger of mine who has had multiple posts that have been featured in my Grand Rounds blog roundup.

I definitely recommend you check his website out.

I was pleasantly surprised when Jeff contacted me and asked if he could offer the following submission for my site which I quickly agreed to.

It sheds light on a very important financial concept that young attending physicians often fail to grasp: Your new-found high salary does not automatically make you wealthy (and therefore you should not start acting like you are).

[Disclaimer: Jeff and I do not have any financial relationship.]

 

 

Is wealth just about having money, or is it about having more money than others?

Usually, people believe that the more your income grows, the wealthier you are. This makes one think that every doctor is affluent.

Even though doctors make an above-average salary, they frequently do not accumulate this type of wealth.

This high income typically entices them to acquire luxurious cars or take extravagant vacations. Or, they may have purchased the “doctor house”, which causes them to be “house poor”  too early in practice.

To understand how wealth differs from income, you have to delineate between the two.

Wealth vs Income

Income is the ability to make money while wealth is produced through income. Earned income, by itself, does not equal riches. While active income is earned through working and treating patients, passive income is generated from assets, such as dividends and real estate.

By investing in assets that reap dividends or generate income (i.e. real estate), you don’t have to worry about earning enough money to survive while treating patients.

If you accumulate this type of income stream, then wealth is built over time.

By directing your money to the cost of living instead of passive income streams, your finances degrade and, regardless of your income, you will have built no wealth at all.

Being truly wealthy is being financially independent.

This is different from active earned income which focuses on your ability to treat patients and requires a portion of your precious time.

As a side note, if you’re new to this wealth vs income concept, consider reading Robert Kiyosaki’s Rich Dad Poor Dad book.

Learning By Example

When noting the distinctions between wealth and income, it is best to use real-life instances.

Remember this concept for building wealth:  Assets put money in the bank while liabilities take money out.

Below are two stories that highlight the difference between wealth and income, using the example of an average paid manager vs a well paid doctor from Money Crashers:

Story #1:

Adam began working at age 22 at a state institution where he paid in-state tuition. Despite his beginning salary, Adam is financially secure. He invested 10% of his salary,and he minimized his credit card debt. Adam earned a managerial job and now makes $60,000 a year.

Adam’s family lives simply, and they live in a humble suburb. They recently paid off their mortgage. When their children were adults, they paid for their autos with cash. While Adam’s family does not earn big salaries, they are not in debt. After 28 years of investing 10% of his salary, Adam has established a portfolio worth $1.5 million.

Adam’s family can continue to live their current lifestyle for more than three decades, and neither Adam nor his wife would have to work again.

Story #2

Although Bill makes a considerable salary, he is not yet affluent. Bill attended an expensive private university, after which he spent roughly $100,000. With his impressive record, Bill got into one of the country’s premier medical schools, accumulating $200,000 in additional student loan debt to acquire his M.D. After finishing medical school, residency, and a fellowship, Bill started earning a salary of $200,000 annually.

Comfortably earning a substantial annual wage, Bill’s family lives well. He received a jumbo mortgage on a $750,000 property with a golf course in an elite gated neighborhood. Bill’s children attend the best local private schools and he and his wife drive upscale foreign vehicles.

Physician Bill has reached a gross yearly income of $350,000. However, Bill’s family’s expenses: the huge house payment, payments on two new automobiles, the children’s private schools, club memberships, clothes, and vacations have led Bill to spend more than he earns annually. If Bill stopped working, his family would go bankrupt.

As the above two stories reveal, having a large income does not help you build wealth. You can have a high income and still be considered poor. Building wealth depends on how you spend your money. Are you willing to forego an extravagant lifestyle to achieve financial independence? If so, you can learn to build wealth and eventually enjoy financial freedom.

How Doctors Can Build Wealth

Now that you understand the difference between wealth vs. income, you might look at your financial situation differently.

You may have previously considered yourself to be wealthy because of being a well paid doctor, but are you really rich?

Building Wealth Through Real Estate

One of the most sustainable means to build wealth is through real estate. As you learn more about building wealth, you’ll find that, with real estate, you can build a strategy to fit your personality.

If you want to start small and actively invest, purchasing a single-family home or duplex might be the best fit.

If you believe in the security of real estate investments, but don’t want to deal with tenants, then passive investing in syndications might work best.  As a side note, most busy doctors that invest in real estate, do so passively.

By investing in real estate, you can benefit from appreciation and cash flow, and gain tax advantages, such as depreciation.

Investing in Stocks

Another method of increasing passive income is by stock investing. Like real estate, you can tailor your approach to suit your personality.

For example, if you are an analytical person, you might enjoy investing in Individual stocks: However, if things such as quarterly earnings reports hold no interest for you, you can take a more passive approach via index fund investing.

Index funds usually come with significantly lower costs and are externally managed. Historically, the S&P 500 has produced total returns of approximately 8% each year, making index funds a good choice for building wealth.

Attaining financial freedom is not achieved by working more hours treating patients. It’s going to take a mindset shift, whereby you think of wealth in terms of the money that’s being generated for you while you’re engaged in other activities.

By learning to build wealth, you will discover you don’t have to trade time for dollars in order to survive.

Are you ready to learn how to obtain real wealth? Join the Passive Investors Circle today.

 

 

 

Note:

If you are in search of financial help, please consider enlisting the service of any of the sponsors of this blog who I feel are part of the “good guys and gals of finance.”

Even a steadfast DIY’er can sometimes gain benefit from the occasional professional input.

 

 

-Xrayvsn