The 9 Stages of Physician Financial Freedom

Milestones seem to define medical education.  As part of our educational progression, many institutions have adopted a system of ‘milestones’ to help define academic trajectory during training.  As an academic physician with an interest in physician finance, I have found the application of these tools for finance enticing.  I personally am very goal oriented.  Having a mental roadmap for where I am and where I am going helps me remain centered and motivated.  As I continue to write and interact with members of the physician finance community, I have noticed a common trend.  This trend revolves around the evolution of physician finances.  From debt accumulation, all the way to retirement and beyond, there are many similarities along the path of physician finance and freedom.  I have compiled a list that I think is an accurate representation of the various stages of physician finance.  If anything, I hope this acts as both a tool and motivational factor for all who are working to build personal wealth and security.  Here are the 9 stages of physician financial freedom!

Stage 1: Debt accumulation

You did it!  You made it into medical school (or dental, or pharmacy school, etc.).  All the years spent studying and dreaming about being a physician have paid off.  You have been accepted into medical school.  Now the real journey begins.

The debt accumulation phase often goes unrecognized.  Inundated by the physical, mental, and emotional stresses of medical school, most students fail to register the sheer amount of debt they are accumulating.  By many standards, the average American medical student will graduate with approximately ~$215,000 worth of educational debt.  Often these federal student loans can carry interest rates as high as 6-8%! 

The debt accumulation phase of financial freedom is the most passive and under-recognized (financially). It is also (arguably) the most significant.  It is here that individuals can have the largest impact on their future finances.  I failed to recognize the amount of debt I was accruing and as a result my wife and I graduated medical school with a combined debt of $670,000!  Yes, that number still hurts to write… even after all these years.

Stage 2: Debt realization

The great awakening.  Every physician at some point in their career (hopefully sooner rather than later) will come to realize the extent of their debt.  Not all physicians walk a similar financial path.  However, for the majority of physicians who accumulate debt during their schooling, there comes a time when we are forced to realize the extent of our debt burden.

For me, this came during my intern year.  I was living in a tiny single bedroom apartment in Virginia.  I had just received my first residency paycheck.  Honestly, it felt really good to get paid for my work.  Finally!  Yet, as the months went by, the novelty of a paycheck wore off and the realization of just how little ‘per hour’ I was getting paid as a resident came into focus.  Then it hit me like a ton of bricks.  How am I supposed to make a dent in my (combined) $670,000 debt when I am only making roughly $35,000 (after taxes)!?

It hit me like a ton of bricks

I was dumbfounded.  This didn’t make any sense!  I was working as a doctor (in training) but for the foreseeable future I was making less than minimum wage (factoring in my 80-100 hour work weeks).  My debt was accumulating interest faster than I could pay it down.  Something had to change, and it needed to happen fast…

This was when my wife (then girlfriend) put our heads together and hatched with a plan.  We needed a way to tackle our student loans.  So… we educated ourselves.  We discovered The White Coat Investor, signed up for personal finance blogs, emails and newsletters.  Together, we wrote a financial plan and built a shared budget.  Once we overcame the panic of our current financial situation, we decided nothing good would come from sulking… we had to be aggressive. 

For most physicians, I would say that this realization occurs sometime between the end of medical school or during residency training.  Debt realization, though painful and anxiety provoking, is a necessary evil.  You cannot develop the drive needed to better your financial footing until you have been jarred by the anxiety that comes from recognizing the financial road ahead.  That’s ok though.  This is necessary.  For those who are willing to continue forward with resolve, fortune awaits. 

Stage 3: Income accumulation

Ok… shake off the debt realization jitters and roll your sleeves up.  Now the real work begins.  Stage 3, or the Income accumulation stage is where you begin to flex your earning potential.  Generally, this stage begins with individuals moonlighting during their post-graduate years. 

Moonlighting offers the opportunity for physicians in training to work extra shifts for higher wages.  They are not necessarily making real attending income, but it sure is significantly better then ACGME salaries.  For me, I was able to moonlight in fellowship.  Just two extra night shifts a month would double my monthly salary.  Double!  That kind of money was life changing for me at that time. 

Welcome to the big leagues

Fortunately, stage 3 also includes your transition out of training and into early attending-hood.  Now the real reimbursement begins.  This tends to separate the ‘men from the boys’ so to speak.  In my experience, there are two groups of physicians that emerge following completion of their training. 

One group of physicians have developed the financial footing to be prepared for such a fundamental shift in their finances.  This group uses their early earnings to build an emergency fund.  They prioritize maxing out their retirement accounts and start to pay down their debt.  When all is said and done, the first few years of these physicians’ lives are not drastically different despite such a colossal change in their income.  That is because they have already made living below their means habitual. 

Unfortunately, the other group of physicians who emerge from training are often underprepared.  These tend to be individuals who allow the feelings of ‘delayed gratification’ to drive their spending habits.  They feel they are ‘owed’ something for their time in training.  These physicians are often quick to buy homes and new cars.  These physicians are shackled by ‘golden handcuffs’ early in their careers.  Don’t be in this group. 

Stage 4: Breaking even

By stage 4, you hopefully have a few years of ‘real doctor money’ under you.  You have been making a 6-figure salary for a few years and you have been executing your financial plan.  By now, physicians normally are starting to enter their financial ‘stride.’  For most, this means automating their finances, maxing out their retirement accounts, and working on ways to eliminate their debt.

Those of you pursuing Public Service Loan Forgiveness (PSLF), you are likely making sure all payments are certified and calculating the months (or years) until your loans are forgiven.  For everyone else, you are prioritizing debt elimination as it has such a high return-on-investment. 

Congratulations… you are worth nothing!

Then one day you wake up to discover that between debt elimination and asset accumulation you officially have a net worth of zero!  This is huge!  All your hard years of education and training have brought you to this point… you are worth… nothing!  And that is something! 

I am joking obviously, but this is actually very worthy of celebration.  You have paid down a substantial portion of debt to reach this point while simultaneously protecting and building your assets.  This is no small feat.  Revel in how far you have come, and be motivated by what more you can accomplish.

Stage 5: Total assets equal 1 year’s living expenses

Stage 5 (and stage 6 for that matter) is a mile marker more than anything.  This stage acts as a goal post on your road towards financial freedom.  As you continue to accumulate assets, there will eventually come a day when you realize, between your retirement accounts, investments, and savings, you have accumulated one year’s worth of living expenses.  For a physician with a 6-figure income who was (likely) starting from a position of negative net worth, having an equivalent amount in assets is a milestone! 

During this stage, many individuals are starting to pay down or eliminate their debt completely.  For those who did not get their debt forgiven or repaid, it is during this stage that a majority are starting to shed the burden of educational debt.  This timing is important as physicians in stage 5 are often less than a decade out from training completion.  These individuals would be considered early to mid-career physicians.  This is often when the threat of burnout is looming.  For those who have spent the past years prioritizing debt elimination and asset accumulation, they are often the most financially able to fend off feelings of fatigue and burnout.  

I think it worthy of noting that stage 5 tends to be when individuals and families develop the financial breathing room to think long-term.  Do I still want to be practicing medicine in 20 years?  How often can I travel?  Will I have the time and money to pursue other interests?  When do I want to retire?  With debt mostly behind you, here is where you can start to seriously consider what your future may hold. 

Stage 6: Total assets equal 5-years’ living expenses

In keeping with stage 5, stage 6 is the next logical step on the path towards financial freedom.  With step 6 comes more security with one’s financial foundation.  By now you have paid off all educational debt.  Any remaining debt is likely your mortgage or accumulated from real estate ventures (should you choose to incorporate this into your portfolio). 

Accumulating enough wealth to cover 5-years’ worth of living expenses puts extra padding on your growing nest egg.  You are by no means ready to retire, but your finances are well on their way.  Stage 6 is largely defined by persistence.  Individuals who reach stage 6 have successfully navigated the challenges of prior stages and come out on top.  As such, physicians in this stage understand the nuances of their finances.  They are maxing out all vehicles for savings and have the opportunity funds to explore more lucrative opportunities.  Now is when many consider paying off their mortgage (if you’re so debt averse). 

Stage 6 is when you might start to appreciate the power of compounding interest.  By now you are nearing 10 years of attending-hood (or more).  You have checked off many of your short-term and medium-term financial goals.  Your children’s 529s are full and ready to cover educational expenses.  Your retirement savings are on autopilot.  The career you have devoted your life to has become routine.  More time has passed, and you’re not getting any younger.  You think you are prepared to prioritize what matters.  Financial independence no longer seems like a distant, unattainable goal… and with it within reach, you want it more than ever.

Stage 7: Interest from assets covers essential expenses

Stage 7 and beyond can happen with varying degrees of brevity based one your savings rate.  However, from here on out we will be talking about different levels of financial independence.  Stage 7 addresses what has previously been labeled as ‘thin’ financial independence. 

‘Thin’ financial independence

‘Thin’ financial independence is creating enough interest from your assets that you can reasonably, safely, and consistently cover your essential expenses.  What do I mean by essential expenses?  These are the absolute required expenses needed to keep you alive, fed, and sheltered.  These expenses would include your mortgage payment, grocery expenses, utilities, gasoline, etc.  The. Bare. Essentials.  Now this may not seem like the achievement I am making it out to be… but think again. 

What I am implying is that you now have eliminated your debts (maybe your mortgage too), have made retirement savings automatic, and your investment portfolio is now large enough that the interest alone covers the expenses to keep you alive.  By all intents and purposes, you have ‘FU’ money.  Technically, at this stage, you could walk away from your job and be able to sustain yourself indefinitely.  It would be an incredibly frugal lifestyle, but financial independence nonetheless. 

Stage 8: Interest from assets covers all living expenses

So, you decided to not retire with ‘thin’ financial independence.  I get that.  I probably wouldn’t either.  You have continued to build a much larger nest egg.  Your retirement accounts are well into the 7-figure range, potentially 8-figure.  This may seem astronomically large for some readers, but with the high-income potential of many physicians, this is not only possible, but expected if you plan to reach financial freedom while maintaining your current quality of life. 

‘Fat’ financial independence

Stage 8, having enough interest from your investments to cover all of your current living expenses, is what we would label ‘fat’ financial independence.  By this penultimate stage you have put in the blood, sweat, and tears necessary to create something special.  All your long years of education and hard work have culminated in this moment.  Not only have you eliminated your liabilities, but you have exponentially grown your assets.  Aside from your employment retirement accounts, you have built a massive investment portfolio that has weathered the ever-changing economy.  Despite it all, you have ‘stayed the course.’  Your reward is financial freedom that allows you to maintain the current quality of life you have come to enjoy.  The interest on your investments alone is producing enough income to cover all of your living expenses.  Anything else is just ‘icing on the cake.’ 

If you did not retire when you reached ‘thin’ financial independence, this tends to be where a larger portion will exit the ‘rat race.’  Here is where most would justify early retirement.  Your income, your savings rate, and the real return on your investments will dictate when you reach this point.  No matter the path, this is truly what you have been building towards…the ability to walk away without any real financial ramifications.  Congratulations. 

Stage 9: Financial freedom and beyond

Ahh the mountaintop.  The air is much sweeter up here, and relatively unknown to many others.  Every stage leading up to this moment is worthy of celebration… but this is something other-worldly.  The culmination of every financial decision has led you to this point.  Some define stage 9 as ‘generational wealth,’ others define it as luxury.  No matter the lens you view true financial freedom, this is it. 

An achievement shared by few

Stage 9 is rarely reached, but for those who do make it to this point, you deserve every penny.  This is where money is no longer a limitation (within reason).  You may not be able to buy a Ferrari to help you travel between your mountain house and your beach house, but you have more than enough.  Your investment portfolio not only covers all living expenses, but it is actually making you more and more money with each passing year.  Your current lifestyle expenses cannot even spend all the interest your wealth is creating!

Some reach this stage through dedication, patient steady investing, and a strong market.  Others reach this stage through the creation of a business, entrepreneurship, or inheritance.  No matter the road, you now have the financial power to make an enormous impact on what you value.  Maybe you take on more ambitious philanthropic endeavors.  Maybe you set up trusts to secure the financial future of your children and grandchildren.  Perhaps you help local businesses in your community.  With financial anxiety a thing of the past, now your imagination is your only limitation.  You are completely free. 

Take home points

The journey towards financial freedom is long and not for the faint of heart.  For physicians, this voyage is started later in life and (often) defined by the accumulation of overwhelming amounts of educational debt.  True, our profession benefits from high-incomes, but it comes at the expense of time.  How one chooses to utilize their ‘financial superpower’ can lead to wildly different outcomes.  For individuals focused on financial security and ultimately freedom, I hope these stages offer ‘mile markers’ on your journey.  Each and every stage is an important step on your path.  Each achievement, both big and small, is worthy of celebration.  As always…

Stay motivated!

The Motivated M.D.

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