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Controlling the Euphoria of Newly Acquired Wealth

Staff Writers 

A physician’s spending patterns can be drastically altered with the receipt of a financial windfall. Caught up in the euphoria of sudden riches, newly wealthy doctors, as with most people, often purchase new homes and buy flashy sport cars, boats, airplanes and jewelry, etc.

Some may even be driven to fulfill the message of a common bumper sticker: “He who dies with the most toys wins.” 

Cash Flow Management is Key

For these medical professionals, current cash flow management takes on a new importance.  Adequate resources must be set aside to fund future needs, or else fewer resources will be available in the future to fund an affluent lifestyle. If resources are depleted, the doctor may be forced to reduce spending to the pre-wealth level.

The lucky physician and his/her health economist – or physician focused financial advisor – should construct projections of expected net worth accumulations to contrast the long-term impact of current consumption with saving and reinvestment at various levels. These models can be used to educate the newly rich about the implications of drastically changing their lifestyles.

Consider a “Spending-Hiatus”

The physician should also consider a “spending-hiatus” on major expenditures or changes in lifestyle. It is a good suggestion that the newly wealthy make no changes in employment – medical practice – housing, or make major acquisitions for twelve months.

Such a “cooling off” period allows the physician to make long-term plans before consuming a large portion of the wealth. 

Example: 

Dr. Mary Jones recently won the lottery and hired a health economist for advice. As a jackpot winner, she will receive $150,000 each year for the next 20 years.

The economist suggested that in the first year she use not more than $35,000 to purchase new “things” and that she should not change her employment until after twelve months. She should not purchase a new home until she receives the lottery proceeds for the second year. Loans and gifts to family members should be kept within the $35,000 “things” budget until the proceeds for the third year are received.

Assessment

By keeping a deliberate and controlled attitude toward spending, Mary has time to develop a new attitude toward money. This includes developing a long-term plan for dealing with the wealth, while avoiding immediate decisions that cannot be easily reversed. 

 Don’t Forget Tax Planning

The newly wealthy doctor also must plan for a potentially large income tax obligation in the first year. Depending on the source of the wealth, the new wealth can create the first significant tax liabilities that the physician has ever incurred. The newly wealthy often overlook the tax burden that comes with their new assets.  

For example, when a medical practice owner – or physician executive – sells a closely held clinic valued at $5 million, the true resource available to the owner is only half that after taking into account the related federal and state tax burden. A stock portfolio with a trading value of $1 million is actually worth less when the related taxes are subtracted on liquidation. 

Developing a short-term budget for disbursements can also help the newly wealthy maintain control over his/her personal, real and financial assets?

Although it may no longer be necessary to strictly watch each dollar that is spent, it is important to implement total preset levels of spending within specific categories. 

Practice Employment 

For a newly wealthy doctor, continuing to work after receiving a windfall is more than just a financial decision; it may be a life-goal. After developing a long-term net worth and cash disbursement model, he or she can make an informed financial decision regarding continuing to practice. A purely financial decision, however, does not take into account the emotional and psychological ramifications of significantly altering one’s professional standing and social lifestyle by quitting the profession.

The advantages of continuing to practice include the social support of involvement with one’s professional or vocational peers, self-fulfillment and the full utilization of available time, experience and prior education. Medicine after all, is still a noble professional that is highly regarded.

The advantages of not practicing include having time available to pursue non-income-producing activities, such as spending time with family members, traveling, volunteering for nonprofit healthcare organizations, practicing pro-bono and teaching; etc.

Conclusion

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