Today’s classic is republished by White Coat Investor. You can see the original here.
I’ve already written about the importance of having both good offense (make money) and good defense (save money). Lately I’ve been thinking about life and what to bring your attention to at each particular stage. As the preacher said in preachers:
“For everything there is a season and a time for every purpose under the sky: A time to be born and a time to die; a time to plant and a time to pick the planted …A time to get and a time to lose; a time to keep and a time to throw away … “
I see a lot of people working on the wrong thing at the wrong time and that delays their prosperity. They would do better if they followed the offense-defense-offense path.
Let me explain.
The first step in wealth accumulation must be a criminal offense
Imagine a teenager or young adult. She basically has nothing. No education, no income, no savings, no retirement accounts … nothing. What is the first thing that person needs to do to build wealth? Well, she has to make money. Insult must come first. You cannot save your path to riches. It doesn’t matter how many Ziploc bags you wash or reuse paper towels. If you never earn more than the poverty line, you will never build wealth.
Well I know that seems obvious when you read it. But the fact remains that there are millions of people out there trying to do just that – get rich on low incomes. Getting rich on a moderate income is possible. It takes long, long and a lot of discipline. But with low income? It just doesn’t happen. So you need to take care of the insult first. This doesn’t mean you should be wasting money, but when giving financial advice to a young person, you’re telling them to find something for their life that meets two criteria:
- Makes a lot of money
- Is reasonably enjoyable, or at least comfortable enough to stick with it long enough to get rich (even better if you feel passionate about it, but that may not be possible for everyone).
As Jonathan Clements says in his excellent book How to Think About Money:
“When I speak to college students, I don’t tell them to follow their dreams. Instead, I tell them to focus on making money and saving. In fact, I suggest they make a conscious decision to find a less interesting but better paying job in order to waste serious sums of money. All of this may sound deadly boring and excruciatingly reactionary. Aren’t the 20 year olds destined to indulge their passions before the demands of starting a family and monthly mortgage payment burden them? This is based on an implicit – but seldom studied – assumption: that in our 20s it is somehow more important to pursue our passions than in our 50s. I think this is nonsense. In fact, I think exactly the opposite is the case. “
Wanna get rich Go make some money. For a typical high income professional, this means immersing yourself in their studies and extracurricular activities, making sure you get to vocational school as soon as possible, making sure you get any postgraduate education that you may need to complete your chosen education Make sure to take on a job in your field with a top 50% salary upon graduation.
While you want to develop good habits and avoid unnecessary debt, you need to be very careful when it comes to penny knowledge and pound stupidity. It is much better to pay application fees to 10 more schools or programs than having to reapply next year. Much better to pass this job on as an MS2 and get a higher score on USMLE Step 1. It is much better to live near the library so that you waste less time commuting to study.
The second step in wealth accumulation must be defense
This is where the process breaks down for most doctors and is the main purpose of this website. Even a perfect defense cannot win a football game without an attack, but everyone knows that defense wins championships. In the realm of personal finance, defense means stop doing stupid things with your money. What are the stupid things doctors and other high-income professionals do with their money that keep them from being successful despite high incomes? In no particular order:
- No insurance against financial disasters with term life, occupational disability, health, property and liability insurance
- Do not save 20% of their gross income for retirement
- Make bad management decisions with their student loans
- Getting too comfortable with debt
- Paying too much tax
- Do not use all available retirement accounts
- Don’t have a smart investment plan
- Getting bad advice or overpaying for good advice
Step two is to fix all of that stuff. It’s not that difficult either. Much easier than the first step. When doctors leave their specialist office, they have 90% of what they need to be successful. It’s like they’re on the two-yard line. And when you’re on the two-yard line with four downs to play, all you have to do is move the ball 18 inches per play, no fumbling or putting the ball in the air or on the ground. Treating physicians who did not move on to step two do not get richer by causing more offense. This money will just slip through their fingers if they don’t learn how to use it.
Go to step three – more offenses
Stay here with me, here I see a lot of regular readers mixed up. Let’s look back for a minute.
The first step is to have a reasonably high income. This is an income high enough to pay for your lifestyle and still leave something to build wealth with so you don’t have to worry about putting groceries on the table.
In the second step you set up a “system”. Your system is how you manage money. It includes your insurance plan, your wealth protection plan, your investment plan, your debt management plan, your spending plan, your donation plan, and even your estate plan. After a while, it’s pretty much on autopilot. You don’t need six different sensible ways to invest. You only need one. You don’t need to get disability insurance or new trust insurance every year. Most of this stuff ends up going on autopilot. But what you’ve created with these systems is a funnel that directs unspent money to exactly where it needs to go. If you improve on this funnel, you will quickly run into the law of diminishing returns. More and more work and sacrifice for less and less benefit.
It’s time to move on to step three.
Step three involves pouring more money into the funnel. At this point, the way to build wealth / achieve your goals faster is NOT to keep working on more and more defense. If you are already saving more than 30% of your income for retirement, college, down payments, and other goals, you no longer need to spend more time on thrift and FIRE blogs. Adjusting your asset allocation won’t make much of a difference (and likely will hurt). Changing the credit card won’t move the needle. At this point, the path to wealth is not defense, but attack. This is for you if you’ve already tweaked the second step but still want to do something to help you achieve your goals faster.
You don’t care. The truth is, a doc who did a good job at step one and step two will eventually achieve “enough”. When you’re okay with this (or already have “enough”), enjoy your practice, family, and hobbies. But if you disagree with this and want to get involved in the place that will make the biggest difference to help you achieve your goals, it’s time to start working on income.
That could mean taking a higher paying job. It can mean answering more calls or working more nights. This can mean changing your Payor mix or your procedural mix. It could mean starting a sideline or some type of entrepreneurial activity.
It doesn’t mean spending hours deciding whether TIPS should make up 5% or 10% of your portfolio, reading another personal finance book, pestering your spouse over a $ 50 charge on the credit card, or figuring out whether you should DCA or a package deal can be a bit of a godsend.
Since you have all of your systems already in place, there will be no spillage of extra income going up the funnel and your net worth will grow quickly. My personal example is when WCI started making real money 3 or 4 years ago. All of this extra income ended up in hands ready to be used. If my main goal was to grow my wealth, I would be much better off doing more WCI work than figuring out how to trade options. Before WCI, the answer to step 3 was to do some undeclared work (which I did).
That’s the key. Realize where you are in your financial life and focus on what is making the most difference in your situation now. If you are a medical student, this is the first step. If you’re a new subscriber who just discovered this site last month, this is step two. If you’ve been reading for years and still haven’t had enough, it is likely step three.
What do you think? Have you found this focus on offense-defense-offense beneficial in your life? How are documents working on the wrong thing at the wrong time? Comment below!