Four Rules I Followed To Get Wealthy

Today’s Saturday Selection is a classic post from The White Coat Investor. I apologize if the title is misleading. Perhaps I should have replaced “I” with “WCI,” but the truth is, I’ve followed these same principles, so I let it stand.

As per usual, this post originally appeared at the WCI network partner site The White Coat Investor.


 

I guess we’re rich now.

It’s not a huge surprise. As a resident, we made a plan to get rich. We then followed it. It was a good plan and so it worked. In fact, it worked a little faster than we had expected, but even if it hadn’t, we would have gotten rich eventually anyway. As I look back, there were a few rules that we followed that seemed to make a big difference.

Rule # 1: Always Pay Cash

 

Credit is pretty easy to get. In fact, the wealthier you get the more credit that becomes available to you. For instance, I expect to put several hundred thousand dollars on a credit card this year since all of our taxes and most of our expenses now go on there.

However, ever since medical school graduation we have made a habit, a rule even, of always paying cash for whatever we want. Sure, it might run through a credit card, but that credit card is paid on the due date before any interest charges occur.

If we need a car, we see how much cash we have, and we either only buy a car with that amount of money or we wait and save up some more. We paid cash for vacations, appliances, home improvements, and even a fancy wakeboat. If we didn’t have the cash that meant to us that we could not afford it. So we didn’t buy it.

This even applied to our educations for the most part. I was kind of dumb as a freshman, and took out a $5K loan. But after that, I worked my way through undergraduate to cover my living expenses and busted my butt to maintain my tuition scholarship.

My wife also had some small scholarships, some family college savings, and worked her entire way through undergraduate. When we hit medical/graduate school, I signed on with the military to pay for school and she worked as a teaching assistant.

We both took other jobs during school to avoid taking on more debt. I suppose we made an exception for buying homes, but even there we saved up a 20% cash down payment and then paid more than we had to toward the homes. The White Coat Investor, LLC was bootstrapped. It has never had any debt. That’s tough to do with many businesses, but not this one. I never added expenses before I had the income to pay for them.

This mindset of always paying cash not only saves interest (although in our low interest rate times, sometimes that effect is pretty small) but mostly curbs our desire to spend more than we should. We spend less because we’re spending cash, and the difference between what we earn and what we spend has made us wealthy.

 

Rule # 2: Always Max Out Retirement Accounts

 

a real rocket scientist

This long term WCI reader actually is a rocket scientist — enjoying a powder day in Utah

 

This rule is a commitment we actually wrote into our Investing Personal Statement. Ever since residency I have been a student of retirement accounts. Eventually I was asked to write the chapter on IRAs for The Bogleheads Guide To Retirement. I’ve learned all about them and am well aware of their massive benefits.

But aside from the tax and asset protection benefits, a commitment to always max them out forces one to do a couple of things. First, you have to prioritize retirement savings, delaying the purchase of other items. Retirement savings contributions have deadlines that must be met, but that new car does not. Second, you pay a lot less in taxes, money which then goes toward building further wealth.

We maxed out our retirement accounts when that total was $6K in residency. We continue to max them out now, even as the total creeps toward $200K (a 401(k)/PSP, two individual 401(k)s, DBP, Backdoor Roth IRAs, HSA etc.)  Will we max them out forever? Who knows, but it sure seems to have been a good idea for the last decade.

 

Rule # 3: Own Stuff

 

The real key to wealth/financial independence is to own stuff, and when I say stuff, I mean stuff that makes you richer, like businesses. For example, when I came out of the military, it was very important to me to join an emergency medicine group where I would be a partner, i.e. an owner.

There is additional risk and hassle to doing that. We have to do our own hiring and firing. Contracts have to be made, billing and benefits companies have to be chosen, and competitors have to be fought off. But when a business does well, those who own it do well whereas the employees get what their contract says they get. So if your contract pays you $15K a month, but your business generates $25K after expenses one month, that additional $10K goes to the owner of the business.

I’ve had a lot of “Extra $10K months” over the last 4 years since I made partner and it has made a big difference in our financial state.

An entrepreneurial approach to life can really pay big dividends. When someone hires your company, they evaluate it by the amount of value you can provide to them. If the price you charge is less than the value, they’ll hire you. But that price can be way higher than it really costs you to provide that service due to your systems, connections, or knowledge. Some businesses (like a website) are inherently scalable. Most of those who become very wealthy own their own business and preferably one that makes money while they’re asleep.

Owning your home can also pay big dividends. Of course, there are times in life when it is better to rent than own, but in the long run, a home owner eventually ends up with a valuable paid-off asset that generally keeps up with inflation, and pays dividends that I like to call “free rent.” A small but significant chunk of our wealth is the equity in our home.

Owning stuff also reduces cash flow issues. If you have a rent payment, mortgage payment, or a car payment, you’ve got to generate the (after-tax) income to make those payments. That money cannot be going toward building wealth.

When we look at investments, we prefer investments that allow us to own businesses-i.e. stocks and real estate, rather than investments that promise a more limited, fixed return such as bonds or insurance policies. Those who wish to become wealthy need to be reasonably aggressive in their investments. A lifetime investing program consisting of CDs and whole life insurance better be coupled with a great income and a high savings rate if you hope for it to succeed.

 

 

Rule # 4: Start Giving It Away Now

 

There is an interesting characteristic I have noticed among many, but obviously not all, wealthy people. They give money away. Many are religious, and believe that God blesses them with more prosperity in return for their generosity. Whether or not that is true, there is definitely a mindset change when you stop looking at money as belonging to you. A “Stewardship Mentality” where you view the money as belonging to God, society, or your family changes your world view such that you manage your money better and curb your desire to spend on yourself.

The more people you help, the richer you seem to be, not necessarily because you earn more money, but because you spend less. The act of becoming more charitable also makes you a better person that other people want to be around. When they want to be around you, they are more likely to want to do business with you and your business does better. You are also happier (from serving others) and thus need less “spending therapy” in a quest for happiness.

We have always given away a significant chunk of our income as a “tithe.” This year we made significant donations to our church, the local homeless shelter, the local food bank and Medecins Sans Frontieres and smaller donations to other charitable groups.

If you do not currently give away any of your money, consider doing so this year and see if it changes how you earn, save, and spend. It may not only make you happier, but wealthier too. While giving money away at your death is also a wonderful thing, I think it is a bit of a cop-out. At that point you’re not giving away your money, you’re just choosing different heirs.

Even beyond charity, we’re already giving money to our kids (always balancing our desire to keep them from taking on unnecessary debt with our desire to avoid economic outpatient syndrome) and our nieces and nephews. Giving can be just as fun as spending or saving.

 

None of these rules are mandatory to become wealthy. However, I think they each have had a significant role in our pathway toward financial independence. Consider implementing one or more of them if you wish to arrive at the same place.

 


You’re still not using Personal Capital? Track all your accounts in one place like I do.


 

[PoF: As I stated in the introduction, I’ve essentially followed these rules. Although I am not quite as wealthy as his family has become, we’re doing pretty well.

Rule 1: Like Dr. Dahle, I never carry a credit card balance, have never financed a car, and we even bought our current home and second home with cash. 

Rule 2: I’ve maxed out retirement accounts throughout my career, and converted a sizable SEP-IRA to a Mega Roth IRA years ago.

Rule 3: I own stuff, although I’ve never been part of a private practice group, and the wannabe minimalist in me is against acquiring more. In terms of businesses, I do have this site and I own most of it, so that counts for something.

Rule 4: Giving it away now? Absolutely. I made it a goal to have 10% of my retirement already donated to donor advised funds before I walk away from this lucrative career. We’re 80% of the way there ($200,000) and that doesn’t count what we’ve given from them and independent of them over the years.]

 

What do you think? Which of these rules do you follow? Do you think following these rules can actually make you wealthier? Why or why not? Comment below!

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22 comments

  • I like Rule #1. I wonder whether it sometimes makes sense to not even use credit cards and pay things only with cash. There’s a decent amount of data indicating that people spend less when they only use cash instead of a credit card, but I’m not sure whether that difference is worth the inconvenience of cash (and the lack of credit card rewards). I know the casinos love having people gamble with poker chips instead of cash, so that it feels like they are not playing with money.

    • Relying on actual paper legal tender is one way to curb spending when other methods have failed. It’s awfully easy to swipe a card and not think about the repercussions. Of course, there can be positives to using credit cards if you have the discipline, which is why WCI puts hundreds of thousands of dollars on a credit card every year. For the purposes of this discussion, using a credit card and paying the balance in full is a cash equivalent.

      The key is not to take on unnecessary debt.

      Cheers!
      -PoF

  • It is good to hear that that you always max out your retirement accounts. This is contrary to what people are used to hear. That is, people tend to max out their credit cards. At the end of the day, they end up in deep debts.
    Thanks for the insight.

  • Those are 4 great rules to follow. Avoid debt, save/invest the maximum amount that you can, own assets that appreciate or a business, and be charitable with your money and time. It really is that simple. Thanks for sharing this classic.

  • Dr.Joe

    I would add an addendum to number one. There are many advantages to credit cards ( points for free trips and upgrades, longer warranties, travel insurance, rental car coverage, free companion tickets ). Read
    ” the points guy”, “frequent miler” or “deals we like” for lots of credit card and travel deals )

    Just keep a zero balance. Credit with benefits.

    • Absolutely. I regularly feature travel hacking posts in the Sunday Best, and have been racking up the points myself. As you’ll note in Rule #1, credit cards are used liberally by the author.

      “For instance, I expect to put several hundred thousand dollars on a credit card this year since all of our taxes and most of our expenses now go on there.

      However, ever since medical school graduation we have made a habit, a rule even, of always paying cash for whatever we want. Sure, it might run through a credit card, but that credit card is paid on the due date before any interest charges occur.”

      Best,
      -PoF

  • Gary Herman

    Another advantage to putting everything on a cash-back credit card.. 2% back on Citi double cash card really adds up.. I have cash that stays in my wallet for ever without being used..

    • Arrgo

      I do the same. I rarely use or have much cash around. I run almost everything through my credit cards for the cash back then always pay them off. Also, Im careful about my purchases in that I dont justify buying things just thinking im getting some cash back.

  • Each of these rules is important, but I think owning stuff is the most important. Most wealthy people got wealthy through owning a business. At least the uber wealthy. Whether it’s more simple like owning some rental properties or owning apartment complexes, or a thriving business like a private practice. The ability to scale time into exponential growth in terms of money generally isn’t accomplished through simply investing money each month.

  • Credit cards are definitely a problem, particularly when you are going into college. All of a sudden you have this spending power you never had before.

    As for owning stuff, it would be nice to own my house but otherwise I want to minimize the “upkeep” required in my life. There is too much hassle to coordinate and maintain rental properties for instance despite the wealth gaining effects. I would rather put my cash in an index fund and hopefully watch it grow.

    I do like that both you and WCI always mention donating. It is a often stated goal of both yours and not a common one for people pursuing FI to think about. So thanks for keeping us all honest.

  • I totally agree with all of these. I think number four is underestimated by a lot of people. Call it an abundance or a stewardship mentality but looking at money as a tool rather than the end all goal is healthier in my opinion.
    Like any tool you want to continue using, you take care of it but when your done with it, you put it back in the drawer so it’s there waiting for you next time you need it. Thanks for sharing. This exchange of posts between you and WCI is great to bring back some advice that isn’t seen as often since their older articles.

    Tom @ HIP

    • Thanks, Tom.

      One of my internal arguments against considering an early retirement is all the good I could do with future earnings that I’m giving up. Building up a giving fund via our DAF equal to about 10% of our nest egg is one way I feel better about the potential of leaving a lucrative profession.

      Cheers!
      -PoF

  • Awesome list!

    A slight change to Rule #3 might be to “Control Stuff” instead of owning it. Definitely a smart idea to have businesses, but the addition might be to never have anything in your name.

    — Jim

  • Does paying 40%+ of your income in taxes count as giving away your money? Or does it count only if it’s voluntary?

  • These are great rules! Right now we are consistently following 3/4. We pay cash for as much as possible and if we use credit, we also pay it off before it accrues interest. We own our cars and are working to pay off our mortgage early and have no consumer debt. The only rule we want to do more of is maxing out our retirement accounts. When we became debt free we doubled our Roth IRA contributions though!

  • KAREN YOUNG

    “better to give with warm hands than cold fingers”

  • Great rules to financial independence and wealth. I especially like the pay cash rule, keeps me honest. Truly no doctor should take out loans for much once they are an attending, exceptions being mortgage and possibly small business loan for new practice. I’m sure there are other exceptions.

    Were struggling with the charity bit. We give in the 5 figures each year, but it could be more for sure. My practice has a foundation that supports patients and I want to give, but I feel like I give a lot to work so it’s hard to “donate to work”. I’m an employee of a non-profit outpatient clinic so giving back is not exactly a business expense for me as I don’t own the practice. I think CEOs struggle with this, as they are pressured to give to so many organization either within or associated with their own business.

    I get a lot of pressure from my employers and staff. Work Fundraiser? Ask the doctors. Raffles tickets for son’s boyscout fundraiser? Ask the doctor. Festival sponsorship? Ask the doctors. Generally I don’t mind. However, am I not giving for the right reasons or does “expected charity” take some pleasure away? (I don’t believe in altruism if you haven’t caught on)

    I haven’t come to a solution yet. Maybe I’ll start out gifting some shares to my employer and having a set amount each year for smaller things to give away. When it’s gone, I’m done.

  • How do you pay your taxes on your credit card? I’d love to do that but this year I had to have the money in my checking account (I’m an entrepreneur so no company takes it out of my paycheck automatically). Please teach me.

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