Today’s Classic is republished from White Coat Investor. You can see the original here.
I've written before about the importance of playing both good offense (making money) and good defense (saving money). Lately, I've been thinking about life and where to focus your attention at any given stage. As the Preacher in Ecclesiastes said,
“To everything, there is a season, and a time to every purpose under the heaven: A time to be born, and a time to die; a time to plant, and a time to pluck up that which is planted…A time to get, and a time to lose; a time to keep, and a time to cast away…”
I see a lot of people who are working on the wrong thing at the wrong time, and it is retarding their achievement of wealth. They would do better if they followed the Offense-Defense-Offense pathway.
Let me explain.
First Step to Building Wealth Must Be 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 this person must do to build wealth? Well, she has to make money. Offense must come first. You cannot save your way to wealth. It doesn't matter how many ziploc baggies you wash or paper towels you reuse. If you never earn more than the poverty line you're never going to build wealth.
Now, I know this seems obvious when you read it. But the fact remains there are millions of people out there trying to do just that—get wealthy on a low income. Getting wealthy on a moderate income is possible. It takes a long, long time and a lot of discipline. But on a low income? It just doesn't happen. So you have to take care of offense first. That doesn't mean you should waste money, but if you're giving financial advice to a young person, tell them to find something to do with their life that meets two criteria:
- Earns a lot of money
- Is reasonably enjoyable, or at least enjoyable enough that you can stick with it long enough to get rich (even better if it is something you feel passionate about, but that may not be possible for everyone).
As Jonathan Clements says in his excellent book How to Think About Money:
“When I talk to college students, I don’t tell them to follow their dreams. Instead, I tell them to focus on making and saving money. I even suggest that they might deliberately opt for a less interesting but higher paying job, so they can sock away serious sums of money. All this might sound deadly dull and horribly reactionary. Aren’t those in their 20s meant to pursue their passions, before they become burdened by the demands of raising a family and making the monthly mortgage payment? Underpinning this is an implicit—but rarely examined—assumption: that pursuing our passions is somehow more important in our 20s than in our 50s. I think this is nonsense. In fact, I think just the opposite is true.”
Want to get rich? Go make some money. What this means for a typical high-income professional is to bury yourself in your studies and extracurricular activities, make sure you get into professional school as soon as possible, make sure you get into any post-graduate training you may need to do your chosen career, and upon finishing, make sure you take a job in your field with a top 50% salary.
While you want to develop good habits and avoid unnecessary debt, you need to be very careful about being penny-wise and pound-foolish. Far better to pay application fees to 10 more schools or programs than to have to apply again next year. Far better to pass on that job as an MS2 and get a higher USMLE Step 1 score. Far better to live near the library so you'll waste less time commuting to study.
Second Step to Building Wealth Must Be Defense
This is where the process breaks down for most doctors, and the main purpose behind this website. Even perfect defense cannot win a football game without any offense, but everyone knows that defense wins championships. In the personal finance realm, defense means to quit doing dumb stuff with your money. What are the dumb things doctors and other high-income professionals do with their money that keeps them from being successful despite a high income? In no particular order:
- Not insuring against financial catastrophes with term life, disability, health, property, and liability insurance
- Not saving 20% of their gross income for retirement
- Making poor management decisions with their student loans
- Becoming too comfortable with debt
- Paying too much in taxes
- Not taking advantage of all their available retirement accounts
- Not having a wise investing plan
- Getting bad advice or overpaying for good advice
Step two is to fix all that stuff. It's not that hard either. Far easier than the first step. By the time doctors come out of residency they've got 90% of what they need for success. 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, not fumble, and not put the ball in the air or on the ground. Attending physicians who haven't moved on to step two aren't going to be any wealthier by producing more offense. That money is just going to keep slipping through their fingers unless they learn how to manage it.
Moving On to Step Three – More Offense
Stay with me here, this is where I see many regular readers mess up. Let's review for a minute.
Step one is to get yourself a reasonably high income. This is an income high enough to pay for your lifestyle and still leave something to build wealth with such that there are no concerns about putting food on the table.
Step two is where you put a “system” in place. Your system is how you will manage money. It includes your insurance plan, your asset protection plan, your investing plan, your debt management plan, your spending plan, your giving plan, and even your estate plan. After a while, it's pretty much on autopilot. You don't need six different reasonable ways to invest. You only need one. You don't need to buy disability insurance or some new trust every year. Most of this stuff goes on autopilot eventually. But what you have created with these systems is a funnel that directs any unspent money exactly where it needs to go. Improving that funnel quickly puts you up against 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/reach your goals faster is NOT to continually work on more and more defense. If you're already saving 30%+ of your income for retirement, college, down payments, and other goals, you don't need to spend more time on frugality and FIRE blogs. Tweaking your asset allocation isn't going to make a huge difference (and will probably hurt). Switching credit cards isn't going to move the needle. At this point, the path to more wealth is not more defense, it's more offense. This is for you if you've optimized the heck out of step two already but still want to do something to reach your goals faster.
You may not care. The truth is that a doc who has done a good job at step one and step two will reach “enough” eventually. If you're fine with that (or if you already have “enough”), go enjoy your practice, your family, and your hobbies. But if you're not fine with that and want to put in your effort at the place that will make the biggest difference in reaching your goals, it's time to work on income.
That might mean taking a higher-paying job. It might mean taking more call or working more nights. It might mean changing your payor mix or your procedure mix. It might mean starting a side hustle or some type of entrepreneurial pursuit.
What it doesn't mean is spending hours trying to decide whether TIPS should be 5% or 10% of your portfolio, reading yet another personal finance book, harassing your spouse over a $50 charge on the credit card, or trying to determine whether you should DCA or lump sum a minor windfall.
Since you have all your systems already in place, none of the additional income that comes into the top of the funnel is spilled and it rapidly increases your wealth. My personal example is when WCI started making real money 3 or 4 years ago. All that extra income landed in hands prepared to take advantage of it. If my main goal was to increase my wealth I would be far better off doing more WCI work than trying to figure out how to trade options. Prior to WCI, the answer to step 3 was to do some moonlighting (which I did).
That's the key. Recognize where you are at in your financial life and focus on what will make the biggest difference now in your situation. If you're a med stud, that's step one. If you're a new attending who just found this site last month, it's step two. If you've been reading for years and still don't have enough, it's probably step three.
What do you think? Have you found this offense-defense-offense focus to be beneficial in your life? In what ways do you see docs working on the wrong thing at the wrong time? Comment below!
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