What is Financial Independence?

What is financial independence and why blog about it?

Here at The Motivated M.D., we write a lot about personal finance.  Much of what I tend to focus on has to do with optimizing your finances to alleviate the stress that often walks in tandem with wealth.  As I have alluded to multiple times, my ultimate goal is to achieve financial independence.  What is financial independence exactly?

I realized today that I have previously avoided writing on the definition of financial independence.  I may have subconsciously done this for many reasons.  Reasons for pursuing financial independence (often uses synonymously with financial freedom) can be wide ranging and difficult to pin down.  Different people have different motivations.  However, with this post, I wish to define what financial independence is and why it is important.  Let’s get started.

The cold, hard facts about financial independence

Before we take the 30,000 ft. view of financial independence, lets first talk a little bit about numbers and definitions. 

Financial independence is having enough money saved to live the remainder of your life without relying on continuous income from a career.  Stated in another way, it is having enough wealth to pay all of your living expenses for the rest of your live, without depending on a 9-to-5 or another individual’s assets.  Does that make sense?

Essentially, you have enough money hoarded away (savings, investments, etc.) to support all of your expenses for the rest of your life.  No more job needed. 

No more job ‘needed’

Financial independence isn’t necessarily about quitting your job (often called ‘FU’ money), but that can be an option.  Financial independence is about having enough to ‘work because you want to, not because you have to.’  I think this is really important to clarify. 

If you descend into the particular, there are all sorts of blogs and websites dedicated to building enough wealth to leave their careers.  This is great and I am totally in support of this…if that is your goal.  However, for many, their job is their motivation.  For individuals who love what they do, that should not dis-incentivize you from pursuing financial independence.  In fact, I would argue that it will make your job more enjoyable! 

As it applies to physicians, we are fortunate enough to have careers that theoretically allow us to reach financial independence with some brevity.   Our income can act as a financial superpower, if harnessed appropriately, but there is a catch.

What the lay community doesn’t understand about physician finance

There is something that must be addressed here as it pertains to physicians pursuing financial independence.  Physicians, like other professions, can achieve financial freedom with enough grit.  However, what the lay community may not understand about physicians is that it usually is not as easy as it would seem.

Physicians, at least in American culture, are routinely described as ‘rich.’  Here is a profession that requires significant education, but ultimately results in a high income.  It is important that we do not use ‘rich’ and ‘high-income’ as synonymous.  High income means your annual salary is above the average income in your country.  By that standard, in the United States, physicians have very high-incomes indeed.  Unfortunately, what many fail to recognize is the opportunity cost that comes with pursing medical education. 

The cost of pursuing medicine

Physicians, on average enter medical school following completion of their undergraduate training.  Of note, it is no longer an overwhelming majority who enter medical school the same year as their college graduation.  Normally, individuals (either electively or non-electively) take a year off to gain further medical experience or pursue avenues to increase their competitiveness as applicants. 

The four years of medical education is difficult, but often shadowed by an overwhelming amount of educational debt accumulated.  Most recent literature places the average US medical student debt at approximately $215,000!  From here, medical school graduates are required to pursue a residency which ranges from 3-7 years, depending on your specialty.  During residency (post-graduate training) physicians are reimbursed substantially less than their healthcare colleagues (i.e. nurses, respiratory therapists, patient care technicians, etc.).  On average, residents are paid between $45,000-$55,000 dollars annually (pre-tax) based on the most recent ACGME data. 

Residency reimbursement by the numbers

To understand that number more literally, residents carry the responsibility associated with physicians, but work 80 hours (or more) a week.  If a resident makes $50,000 annually, that is approximately $4,166 monthly, or $1,041 weekly.  That is roughly $13.00 an hour, before taxes.  If you factor in taxes their take home pay is about $10 an hour if you assume a tax rate of 22% given their individual income. 

Now, to preface, I recognize that minimum wage is approximately $7-$9 depending on your state, but being (essentially) minimum wage as a physician with a 6-figure debt can be overwhelming.  You can see why individuals who complete their medical education in their early to mid-thirties feel mislabeled as ‘rich.’  We exit training with a profoundly negative net worth, a monstrous debt, and a world that thinks us greedy… 

Playing ‘catch-up’

What’s more, people don’t understand that individuals who enter their careers after high school or college may have a lower income, but have a decade’s (or more) worth of time to save, invest, and eliminate debt.  They are able to start earning as early as 18-21 years old, commonly without significant debt.  They have a huge leg up in accumulating and building wealth.  It is an aspect of physician finance that goes wholly unrecognized outside of those in the medical field. 

I fully recognize that physicians are able to play ‘catch up’ relatively quickly.  However, gone are the days where physicians are able to ‘have it all.’  Physicians who are intelligent with their money and frugal with their lifestyle can still carve out a great life for themselves.  Achieving ‘the good life’ takes exponentially more hard work, dedication, and financial education than it did in any generation prior.

Why is financial independence important?

This leads me to my bigger point.  Why define financial independence?  Why are there so many physicians writing about personal finance, passive income, and financial freedom all the time?  It boils down to a need to ‘make up for lost time.’ 

Physicians in the United States receive no formal financial education what-so-ever.  All those sleepless nights studying for exams, all the late hours and 24-hour shifts are spent prioritizing others.  We spend a majority of our lives understanding the intricacies of the human body so we can help others.  There is such a pressure to lead through altruism that we often fail to factor our personal, mental, and financial health into our livelihoods.  We take this group of eager, young physicians, beat them down tirelessly with education, then drop them back into the world with a fat paycheck, a tsunami of debt, and the financial education of an adolescent.  Not an ideal scenario. 

Many starting residencies or beginning their attending life feel an ‘all-too-real’ sense of ‘imposter syndrome’ both clinically and financially.  With social media being ubiquitous, there is an overwhelming sensation for physicians to catch up to their non-physician (or older physician) peers.  A reaction from delayed gratification, if you will.  This need drives irresponsible spending and lifestyle creep that ultimately places physicians even worse off!  This initiates an unhealthy cycle of financial instability, stress, and burnout.  This creates physicians who have spent their entire lives in pursuit of their careers, only to resent it way before they are financially stable enough to consider alternative career paths.

The booming ‘physician finance’ niche

It is no wonder why people like Dr. Jim Dahle of The White Coat Investor, Dr. Leif Dahleen of Physician on Fire, or Dr. Cory S. Fawcett of Financial Success M.D. (just to name a few) have found success in the niche of physician personal finance.  There is a wealth of physicians struggling to understand their financial situation, much less see a solution!

Financial independence, and the FIRE movement (Financial Independence, Retire Early) has gained significant momentum with our current generation of physicians because it offers that solution.  A solution to the ‘rat race’ that so many inherit in order to achieve their dream of becoming a doctor.  Financial independence is important because it teaches physicians to harness their high income and turn it into financial sustainability.  It educates physicians to not expand their lifestyle at the same pace as their income (upon ‘making the big bucks’).  This allows for the promise of a life where physicians are choosing to work because they want to…not because they have to.  There is a massive distinguishment here in the eyes of physicians. 

No matter how much I love patient care, until I can reach financial independence, I will always be shackled to my career to ‘stay afloat.’ 

Financial independence is a spectrum

The truth is financial independence actually lies on a spectrum.  Financial independence, by the numbers, is choosing an annual income you wish to achieve.  One must determine how much money is needed so that a safe withdrawal rate (usually 3%-5%) affords that annual income expectation.  For example, let’s say I plan to live off of $100,000 annually (hopefully the mortgage and student loans are eliminated).  If I am 30 years old making an average physician salary of $250,000 (pre-tax), have a net worth of $0, start maxing out retirement contributions, eliminating debt rapidly, withdrawing 4% annually, and assuming inflations returns to a stable 3% or so… then rough estimates would dictate I need approximately $2,500,000 to reach financial independence. 

Now, $2.5 million is strictly to reach a number where I can claim I am no longer dependent on my career.  This is often called ‘thin’ financial independence.  ‘Thin’ meaning that you can pay your annual expenses and live financially free…but just on the bare minimum.  One could argue that this is far less than $100,000…but it was a nice easy number to use. 

For individuals with loftier goals, they can continue to accumulate wealth, thus growing the ‘financial independence pot’ so to speak.  The more ‘buffer’ you wish to have during financial independence, the larger your nest egg needs to be.  ‘Fat’ financial independence is where your ~4% withdrawal rate covers well more than just your baseline living expenses.  ‘Fat’ financial independence allows for more luxurious expenses.  Anything past ‘fat’ financial independence is just icing on the cake.  Some create such large nest eggs that they often enjoy their later years with more in their savings than when they started!  Now that is compounding interest at work!

Take home points

The idea of financial independence offers a future where I no longer have to carry the weight of financial anxiety.  I don’t have to share it with my wife nor shield it from my children.  It offers a life where I can make choices based on what I ‘want’ to do… not what I ‘need’ to do.  This may seem selfish, but we entered careers defined by selflessness.  It is high time that we focus a little more on ourselves, our futures, and quality of life.  As always…

Stay motivated,

The Motivated M.D.

If you found this article helpful, we have a number of incredibly useful articles that are quite applicable to the pursuit of financial independence.  Make sure to check out How to Write a Financial Plan.  Also, make sure to check out Emergency Fund: Your First Financial Goal. 

Lastly, make sure to check out The Motivated M.D.’s story on pursuing financial freedom.  We have a series called My Physician Side Hustle as well as Graphing Our Loan Repayment Progress.  All of these are great places to get started!

Thank you so much for reading this article on What is Financial Independence?  I hope you enjoyed it!  If you did, it would be great if you would be willing to share this post using the ‘share’ buttons at the bottom of this article.  Further, I would love it if you would be willing to follow us on social media.  Our social media links can be found to the right (on desktop) or at the bottom (on mobile). Thank you!

What has been your perspective on financial independence?  Do you think it is all it is cracked up to be?  If you have any thoughts, we would love to hear about them in the comments below.  We always love to hear from you!

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