Why Lifestyle Matters

How lifestyle choices affect financial independence

Lifestyle and ‘lifestyle creep’ can have a significant impact on a family’s ability to achieve financial independence. With this post, I want us to look at two physician families and why their respective lifestyle choices drastically influence their finances.  This is why lifestyle matters!

Meet Family #1

Family #1 includes a private practice cardiologist married to a hospital employed urologist.  They have two children, both elementary school age.  Their gross income is approximately $1,000,000 and their take home pay is roughly $600,000.  They carry approximately $500,000 in total debt between them but they are planning to pay it off ‘eventually.’  They have previously refinanced their student loans, as their financial advisor instructed them. They make their required minimum student loan payment each month, roughly $8,333 between the two of them.  This totals about $100,000 towards their debt annually.  They feel a 6-figure payment towards their educational debt is ‘plenty,’ justifying spending the rest on maintaining their current standard of living.

Keeping up with the Joneses…

They love the fact that they reside in the nicest house on the block.  They spent ‘a little more’ than they wanted, but it was the last water-front property in the area!  After all the $2,500,000 mortgage of their home pales in comparison to the ‘great’ investment it will be long-term.  They are pleased to boast that their children go to private school, reminding you ‘it’s worth every penny.’  They prefer to host family gatherings as they flaunt multiple amenities, including a new pool in their backyard, a gym, a spa, a membership to the local country club, and an endless supply of restaurants ‘you must try’ downtown.    

Their image is important to them.  Because of this, they work to maintain their home externally and internally with the latest trends.  They afford weekly home cleaning and lawn care services.  Their furnishings are upgraded with regularity too.  They have multiple fitness memberships and intermittently pay for a personal trainer.  Being seen in each of their financed Tesla model X’s brings a smile to their faces.  Lastly, their social media accounts display a litany of travels.  They prioritize two annual international trips, as well as a ski trip out west.  They spare no expense when traveling either, asserting their need to experience ‘the best!’

The American dream

On the surface they live ‘the American dream.’  They have their dream home, in their dream location.  They have avoided increasing their debt payments to maintain their lifestyle.  What you don’t see is their absence of a written financial plan.  They have a financial advisor who claims to have a plan for them, but they are unclear of its substance.  The idea of financial independence is appealing but they have never sat down and crunched the numbers.  They assumed they would retire early (maybe 50?) and maintain their current lifestyle. 

Meet Family #2

Let us move onto Family #2.  Family #2 aspires to similar goals as Family #1 regarding financial independence.  This family consists of two internists, a husband and wife, with two school aged children in public school also.  They make approximately $625,000 before taxes and take home about $375,000 annually.  This family also carries a significant debt burden from their medical education.  They similarly have approximately $500,000 worth of educational debt but have been diligently working to refinance to achieve the best rate possible.  They have refinanced three times to secure an interest rate of 3% between the two of them. 

This physician couple has chosen to self-educate extensively about personal finance and financial independence…and they want it…bad.  They feel their salaries afford them to live comfortably indeed, but they have worked hard to create a financial plan and budget that supports their fiscal goals. 

Comfortable living

They bought a house that fit their needs.  Their home feels large to them but is in no way a ‘McMansion.’  They work to keep their monthly expenses reasonable, but they have never felt money as a constraint.  They worked hard to siphon every last penny towards their original goal of rapid debt elimination. 

They currently put approximately 50% of their take-home pay towards their debt.  Refinancing to an interest rate of 3% was very helpful.  The majority of their momentum, however, comes from the sheer amount of money that is put towards their loans annually.  By putting roughly $15,000 towards their debt each month, they are on track to destroy their debt in less than 3 years!

Prioritizing goals

Outside of their lofty debt elimination goal, they still prioritize things that bring them joy.  They too travel once or twice a year.  Often an international trip and a ski trip.  They don’t stay in hostels, but they do look for deals and prioritize travel during off seasons to save money.

They refuse to accumulate more debt.  If they plan to purchase a large expense, they wait until they can afford it in cash.  Both of their vehicles are by no-means ‘beaters,’ but they were purchased used and paid in-full.  Their only debt is their mortgage and their student loans. 

They do their best to maintain their home, but Family #2 maintains their own lawn and spend Sunday afternoons cleaning their home together.  Family #2 has never used a financial advisor but have built a clear and transparent financial plan for themselves.  They are determined and refuse to let anything deviate them from their goals. 

Comparing annual spending

Let us first talk about each family’s spending habits.  It is no secret that Family #1 brings home a significant amount of income!  By the numbers they are millionaires!  They have worked very hard to achieve that.  Unfortunately, the way they approach their lifestyle will significantly hamstring their ability to achieve financial independence at a reasonable time.

Looking further, their home alone costs $80,000 annually, not to mention the property taxes of $50,000, or the cost of annual maintenance.  All said, they spend roughly $230,000 annually on their residence alone.  This is 38% of their take-home pay.  That is a substantial portion of their income.  This is seen frequently with high-income professions that require delayed gratification as a result of extended training.  Their home may be beautiful and deserved, but it will take a whopping bite out of their finances each year. 

Make it big, spend it big

Material goods are also another significant expense.  From beauty products to automobiles, they are spending tens of thousands of dollars each year to maintain their image.  An image that claims ‘we’ve made it!’  Our culture maintains certain expectations of those with high incomes.  The ‘doctor home’ and the ‘doctor car’ are all-too-often bought to portray this image.  The joy of a new car fades…the payment can last for years. 

Approach to debt elimination

The debt elimination strategies between these families is noteworthy.  Family #1 is, by all means, making a significant contribution to their debt elimination.  In fact, they are putting approximately $100,000 towards it!  This is 17% of the family’s income.  However, by not capitalizing on lower interest rates they are leaving money on the table.  5% is an improvement from historical federal interest rates, but it could be lower.  Family #2 has been able to capitalize on fluctuations in the market to achieve a more promising interest rate.  The difference between an interest rate of 5% and 3% may seem insignificant, but overtime can be quite large. 

Let this image do the talking:

Just a 2% difference in their student debt interest rates correlate with a difference of $10,000 accrued annually.  At their current debt repayment rates, Family #2 will be debt free in half the time and spend $53,845 less.  This is the power of rapid debt elimination. 

Pursuing financial independence: Family #1

We have discussed how the lifestyle of Family #1 is significantly hindering their ability to use that $600,000 salary as a financial superpower.  They may ‘make it big’ but they ‘spend it big’ as well.  Because of this they are only saving 13% annually. 

For Family #1, if they continue at this rate, they will be debt free in just over half a decade.  Let’s say they continue to maintain the expectation that they retire to a similar lifestyle (after eliminating their debt).  With student loan payments gone they would be expecting to live off $500,000 annually.  Assuming a 4% withdrawal rate in retirement (for hopefully 30 years), they would need a nest egg of $15,000,000!

In order to reach their goal of financial independence, it would take them 36 years saving $15,000 monthly ($180,000 annually), with a real return of 4% to reach financial independence…not including the 5 years it takes to pay off their debt!  Even assuming a real return of 10%, it would take them 22 years.  Given the duration of education for health care professionals, they often get a late start regarding retirement savings.  Retiring in their 50s is not a possibility without a change in lifestyle, even with their current income of $600,000.  If they want to retire in their 60’s they had better get serious…and no one can work part-time…

Pursuing financial independence: Family #2

Family #2 has worked hard to execute their financial plan.  They created a budget that optimizes debt elimination.  At their current rate they will be debt free in just under 3 years.  Then their most important goal begins…achieving financial independence.  They too wish to maintain a similar lifestyle at retirement, but they are more realistic.  Following debt elimination, their annual expenses fall to $195,000.  For the ease of numbers, we will say they wish to live off of $200,000 annually in retirement. 

Following debt elimination, to reach their goal of financial independence (again assuming a 4% withdrawal rate for 30 years), they would need a nest egg of $6,000,000.  Also a large number, but here is the kicker!  To achieve this nest egg, assuming a real return rate of 4%, they would reach financial independence in 21 years…without changing their lifestyle at all.  If they continue to contribute $180,000 annually towards retirement (the same amount they put towards debt currently), they will reach this goal.  Now if they benefit from a real return rate of 10%, then they would reach financial independence in 14 years.  All of this is achievable simply by shifting their student loan payments to savings.  They make close to half what Family #1 nets, but through lifestyle differences and aggressive savings, their goal of financial independence is attainable. 

Other influential factors

There are a few things to comment on here that affect the numbers I have displayed.

Changes in income

Changes in income can highly influence these numbers.  A loss of employment, or drop in salary is an unfortunate possibility.  Disabilities, short and long-term, can affect these numbers as well.  On the other hand, promotions, bonuses, inheritances, and pay raises can all expedite financial independence and debt elimination (assuming no lifestyle changes).  I have previously written a post on The Importance of Multiple Streams of Income.  Generating multiple streams of revenue can influence your ability to expedite financial independence. 

Paying off your home

Another influential factor would be the elimination of your mortgage.  Mortgage costs are normally a significant part of a family’s budget.  For our example above, Family #1 pays approximately $80,000 annually in mortgage fees and Family #2 pays $36,000.  As such, the elimination of mortgage payments can not only free up money, but decrease your living expenses significantly. 

Market volatility

When I was creating these tables and trajectories, I was assuming certain market returns.  Here, ‘real return rate’ references the actual rate of market return after all other fees and expense ratios are removed.  This number, as reflected above, can also impact the rate at which you reach financial independence.  If you are investing with a long-term mindset, then usually these rates of return are possible and probable!  However, if you use a financial advisor (fees), or utilize investments with high expense ratios (more fees), or try to time the market (incredibly unlikely) then you will be less likely to achieve these real rates. 

Take home points

How you choose to live your life is your choice.  In medicine, we are often jaded by the horror with which we are surrounded.  Lives taken prematurely, life-altering injuries, disabilities, the list goes on.  As a result of the duration of our training, we delay our gratification for years, sometimes a decade or more.  With all of this pent-up responsibility, when we ultimately achieve our attending salaries, we often feel the need to expand our lifestyle to meet our income.  We are heavily influenced by our consumer culture and the need to have our external lifestyle meet societal expectations.  This, however, is a very slippery slope. 

As you can see from reviewing Family #1, it is all too common to see high-income earners live paycheck to paycheck.  Their high income feeds their lifestyle, but also shackles them to it.  Any loss of income and they cannot maintain their current standard of living. 

No one is telling you to ‘live like a resident’ indefinitely.  Even Family #2 does not live like a resident.  However, what they discovered is that their current quality of life is more than enough; a helpful perspective.  With that realization, they have lived on a single physician salary and diverted what remains towards expediting their financial goals. 

Live your life how you see fit, but understand the opportunity costs your lifestyle choices have on your ability to reach financial independence. As always…

Stay motivated!

The Motivated M.D.

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