How Much Money Do You Make – Doctor?

Posted on June 26, 2014 by Dr. David Edward Marcinko MBA MEd CMP™

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Ruminations on the Last Taboo!

By Rick Kahler MS CFP® http://www.KahlerFinancial.com

Rick Kahler CFP“How much money do you make?”

We don’t ask people, let alone doctors and medical professionals, that question; but we’d love to know the answer.

In this country, we’re fixated on a person’s annual income. That’s the primary measure we use to determine social status and define success.

Income Qualifier?

Income also is the qualifier for government welfare programs. It defines people as poor, middle class, or rich. And, of course, it determines how much of your income the government will take. The more you bring in, the higher the percentage of your earnings you will pay in federal, state, and local taxes.

Income as a Poor Indicator of Net Worth

While we project a lot of things onto someone’s income, most of what we project is untrue. Income is not the best indicator of a person’s wealth or net worth.

Examples:

Last year Dr. Brent’s tax return showed an adjusted gross income of $20,000. Dr. Bill’s was $2 million. Who is richer? Most people would say Bill. The US and state governments also would say Bill. Actually, Brent is far and away the wealthier of the two.

Why and How?

Consider these two real-life examples:

  • Dr. Bill lives in New York, New York, which has both high property taxes and a city income tax. Paying city, state, and federal income taxes, plus property taxes on his luxurious home, takes around half of his salary. With take-home pay of about $1 million, Bill spends $1.2 million a year on his mortgage payments, college and private school tuition, and his lifestyle. He overspends his net income by $200,000 a year. He owes more on his condo than it’s worth, and he has significant credit card debt. When you total his assets and liabilities, he has a negative net worth of $1 million. He has managed to hold everything together so far, but technically, Bill is bankrupt.

Jaguar XJ

  • Dr. Brent lives in Rapid City, South Dakota. He is retired, owns a modest home which is paid for, and lives on about $40,000 a year. He didn’t pay any income taxes last year, partly because some of his income is from tax-free municipal bonds and mostly because he wrote off a large investment loss which left him with $20,000 of adjusted gross income. Brent has no debt. His net worth is $5,000,000.

Steering Jaguar

The truth is that what people make tells us very little about whether they are rich or not. In these examples, judging from income alone, it would be easy to reach the inaccurate conclusion that Bill must be far wealthier than Brent. His lifestyle is certainly more lavish—which of course is part of the reason he isn’t wealthy.

Many people who have high incomes but are heavily in debt might have lifestyles lower than others who make significantly less but have no debt. It’s not uncommon that people with high incomes choose to live a lifestyle that is far below what they could afford. In fact, this is one of the best ways to build real wealth.

The Income Non-Indicator

Income is a poor indicator of whether someone is rich. Even more important, it’s a poor indicator of how they handle money. I once worked with a family with an annual income of around $5 million who had a net worth of minus $3.5 million. They may have looked like “millionaires,” but they were not.

On the other hand, I work with many clients who have annual incomes around $100,000 a year, spend $60,000 a year, and are worth $2 to $5 million.

Assessment

The bottom line is that wealth is defined by net worth, not income. A high income doesn’t equal wealth; it equals a better opportunity to build wealth. Not everyone is wise enough to take advantage of that opportunity.

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Conclusion

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3 Responses

  1. Rick Kahler MS CFP®, on June 30, 2014 at 5:50 PM said:

    Happiness and Net Worth

    It isn’t how much you earn that makes you rich, it’s how much you keep—your net worth. And it isn’t how much you are worth that makes you happy, it’s what you spend it on.

    Charles Dickens’s fabled Ebenezer Scrooge embodied this truth. He was very wealthy, no doubt in part because of his frugality. He didn’t spend money socializing, going to plays, or entertaining. He ate the diet of the poorest in society, lived in a cold and draughty house, and barely had enough light to see by. If Scrooge were living today, he would most certainly eat stale cereal and generic macaroni and cheese, keep the thermostat at 64, and only buy 40-watt light bulbs.

    Yet Scrooge was not a happy man. Dickens described him as “Hard and sharp as flint, . . . solitary as an oyster,” and said he “carried his own low temperature always about with him.” While he understood how to save, saving money didn’t make him very happy. And if we can believe modern research, we might conclude one of the reasons he was so miserable is because he didn’t have a clue how to spend.

    Before all you spenders start rejoicing, let me be clear. Spending in itself does not beget happiness. Spending money on the wrong things can bring much unhappiness and suffering into one’s life. It is spending money on the right things that brings happiness.

    Certainly, defining “the right things” is somewhat subjective. Research tells us, however, there are a few things in life that are almost guaranteed to increase happiness or well-being. Spending money on a healthy diet, adequate shelter, clean clothing, good medical care, and reliable transportation is sure to increase happiness. We also know that spending money on experiences rather than things—a family vacation, say, rather than a new bedroom set—will increase happiness.

    Some new research has found something else to add to the list of “right things” we can spend our money on that will significantly increase happiness. According to an article published June 4, 2014, at PsyBlog.com, researchers at the Universities of Manchester and Warwick found that therapy was 32 times as cost effective as money in making you happier. (http://www.spring.org.uk/2014/06/this-is-how-much-happier-therapy-makes-you-than-more-money.php)

    The researchers compared people who had spent money on psychotherapy to those who had experienced large increases in income. They found that the increase in happiness for someone who spent $1,300 on therapy was equivalent to the increase in happiness for someone whose income grew by $42,000 a year. The researchers concluded that the importance of money in improving our well-being and giving us greater happiness is vastly over-valued.

    While this is great news for therapists, who incidentally are among the lowest-paid professionals, don’t expect to see long queues in front of their offices anytime soon. While most people will tell you they don’t believe having money will make one happy, most simply don’t really believe it. If you need proof, just ask the next ten people you meet which they would choose: spending $1,300 for therapy or getting a $21,000 raise (the equivalent of half the happiness value of the therapy).

    If spending money on standard psychotherapy is 32 times as cost-effective as money, is the impact of financial therapy significantly more? The field is new, so for now we just don’t know.

    Too bad we can’t all be like Scrooge, who, true to his frugal nature, had the best of both worlds. The therapeutic intervention of Marley and the Ghosts of Christmas Past, Present, and Future transformed Scrooge into a very happy man. And it didn’t cost him a cent.

    Rick Kahler MS CFP®
    http://www.KahlerFinancial.com

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  2. Ann Miller RN MHA, on July 25, 2014 at 5:11 PM said:

    MDs Moonlighting
    [Physicians expand income by taking secondary jobs]

    Rick – Nearly one-third of physicians earn a secondary income outside of their primary practice, but for many, their motivation to moonlight may not be a financial one.

    http://medicaleconomics.modernmedicine.com/medical-economics/news/moonlighting-physicians-expand-income-experience-taking-secondary-employment

    Here’s why.

    Ann Miller RN MHA

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  3. Hope R. Hetico RN MHA, on May 5, 2015 at 10:44 PM said:

    Physician Specialty, Gender, and Self-Employment Affect Pay

    Here are some key findings from the recently-released annual Medscape Physician Compensation Report:

    • Average annual income for PCPs is $195,000, compared to $284,000 for specialists.
    • The highest-income specialties are orthopedics ($421k), cardiology ($376k), and gastroenterology ($370k).
    • Male physicians earn more ($284,000) than their female counterparts ($215,000).
    • Men tend to dominate high-paying specialties: urology (92%), orthopedics (91%), and cardiology (88%).
    • Self-employed PCPs earn $212,000 compared with their employed counterparts ($189,000).
    • Self-employed specialists, on average, earn $329,000 compared to employed specialists ($258,000).

    Source: WebMD Health Corp., April 21, 2015

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