The Diminishing Returns of More Hard Work

Today’s Saturday Selection comes from The White Coat Investor. Dr. Dahle was way ahead of me in thinking about the upside associated with working less. He published this piece way back in October of 2011 when his blog was less than six months old, and back when I was doing locum tenens work with an infant at home after our home hospital went bankrupt (but before the lawsuit).

I wouldn’t discover his writing for another three-plus years, and it was only last year that I realized how great it would be to work less. Last month, I published a six-month update on my part-time gig and how that’s been going (hint: it’s been swell!).

Every factor pointed me towards part-time work, but there are some factors that could make it less rosy for you. Dr. Dahle will examine both sides of that part-time coin.

This post originally appeared on The White Coat Investor (yes, I said that already — standard disclaimer), but there’s an excellent chance you’ve never read it or have completely forgotten you ever did.


 

I was recently asked by a reader about how to decide when it just wasn’t worth it to work more hours.  He noted he had been cutting down on his hours due to a high marginal income tax rate.  I felt like the subject deserved a little bit of a broader treatment.

4 Factors to Determine How Many Hours to Work

 

1. Marginal Utility of Money


Determine your own marginal utility of money.  Analyze how much you enjoy your job and your hobbies.  See if there isn’t a way you can either increase your hours or decrease your hours to get the mix just right for you. 

It might mean bringing on another partner, paying other docs to take your share of call, or changing the hours the practice is open.  But be open to change. 

First, the concept of marginal utility of money.  This is the point at which having more money doesn’t improve your life at all.  Working, aside from those lucky few who enjoy every minute of their jobs and have no outside hobbies because they prefer practicing medicine over every other activity, is, in the end, essentially trading your time for money.

At a certain point, you’d rather have more time off than more money.  This point is different for everyone, and different for the same person at different stages of their career, and perhaps even different seasons of the year.

I work with a group of emergency physicians that is pretty lifestyle focused.  The average doc in the group works about 100 hours a month in the ED.  Come summertime, several of them want to cut hours even further so they can spend time traveling or playing in the outdoors with their families.

 

summertime at the lake

 

The younger docs with a large amount of student loans, small portfolios, and big mortgages, are usually willing to pick up those shifts.  In September, when the kids go back to school, the older docs want to work more hours. In short, their marginal utility of money increased.  In August, they’d rather have the time.  In September, they’d rather have the money.

 

2. Marginal Tax Rates

 

Second, consider the impact of marginal tax rates on your marginal utility of money.  This is a widely misunderstood concept.  Lots of docs assume there is a point at which it isn’t worth working because Uncle Sam gets everything extra you make.  That is very rarely true.

In fact, it is even possible for a doc making $300K to have a lower marginal tax rate than one making $100K. How is that possible, you ask?  It’s possible because not all the taxes you pay on your income are progressive.

Social security taxes are regressive and Medicare taxes are flat.  When you average it all together, it turns out the curve isn’t nearly as steep as most think it is, at least once you make as much as a resident physician.

Now there’s some additional steepness added in by phase-outs that affect higher earners, but in general, this shouldn’t have a huge effect on your marginal utility of additional income.

 

3. Fixed Overhead Expenses

 

The last factor worth examining is the concept of overhead.  Some of your overhead is variable, but most of it is fixed.  With fixed overhead, everything you make once you pay off the overhead is profit.  Taxable profit to be sure, but profit nonetheless.

Many business expenses are fixed.  Your electric bill, rent for your clinic, base salaries for staff, malpractice premiums, billing and coding expenses etc.  My malpractice carrier doesn’t care if I work 100 hours or 150 hours a month.  There isn’t a break on my premiums unless I drop below something like 75 hours a month.

Some business expenses are variable, of course.  If you’re going to work more, you’ll probably spend a little more on nursing salaries, but that’s likely a small amount compared to the fixed expenses.

Remember that business overhead isn’t the only overhead in your life.  Your personal budget has lots of “overhead” in it.  Some costs are fixed, such as your mortgage, utilities, and insurance.

Some may be variable, such as retirement contributions or charitable contributions that you might fix at a certain percentage of salary (mental accounting, of course).  But once you’ve paid off your fixed expenses, every dollar you make (at least after-tax) is yours to do with as you wish.

Flashy car, nice vacation, nice dinner out etc.  This factor, obviously, has to be weighed against the diminishing utility of additional income/wealth that we all feel as we work more.

Also, bear in mind that LOWERING your personal overhead (expenses) can dramatically lower the point at which you’d rather have more time than more money.  Once your house and student loans are paid for, you may find working 3 weekends a month isn’t exactly what you want to do for the rest of your career.

 

4. Determine What Will Bring You Happiness

 

tropical beach

What will bring you the most happiness?

Somewhere, at the intersection of the marginal utility of money, progressive tax rates, and overhead expenses, both business and personal, we will find a point at which working more simply isn’t worth it to us personally.

Unfortunately, that point is at a different place for everyone, and changes throughout your career.  As Socrates said, “An unexamined life is not worth living.”  Both time and money are limited and fungible (exchangeable), and it is up to you spend them as will do the most good and bring you the most happiness.

So, I’m sorry I’m unable to specify exactly when you should quit working, but hopefully, I’ve given you some things to think about as you make that decision for yourself.

 


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What do you think? Are you working fewer hours? What factors did you consider for making your decision? Comment below!

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12 comments

  • Really great post Doc. The marginal rate issue is one that I think many people really don’t do the math on. But #4 is the big one for me and probably for most. That rule gets into the whole “trading time for money” equation and everyone has to decide where they fall on that scale. It’s a tough thing to nail down. As I get older I’m more convinced of where I stand on that issue 🙂

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  • “Marginal Utility of Money” is a very important, and very difficult, concept to understand. We’ve taught ourselves to value hard work (good!) and to measure the effectiveness of that work with earnings (eh, less good). Couple that with “more is better!” (not always true) and you get into situations where you think working more and earning more is unequivocally better – which it isn’t.

    It becomes very hard to pull yourself away from that and realize that money, to a point, is important but other things are more important. Your health, your relationships, your family, etc. Money is just a number, those other qualitative things is what makes up your life.

  • I remember coming to my wife during my residency with such excitement that I could now earn $100 per hour moonlighting in the ED. I was earning about $3 an hour as a resident.

    She asked, “Are we hurting for money?”
    The answer was NO. We only lived on half of our combined income.

    Then she asked, “Are you home enough now?” The answer was again NO. I was already working about 100 hours a week.

    Then her final question put the nail in the moonlighting coffin. “So why would you work more hours, that you don’t have, to earn more money, that we don’t need?” She was right and I never did a single hour of moonlighting. More money would not have produced more happiness.

    Dr. Cory S. Fawcett
    Prescription for Financial Success

  • I’ll probably do this sooner rather than later. I can’t do it this early in my career, though.

    Once I am debt free, you better believe I’ll be cutting back. Probably to 0.7FTE initially. Then half time for the last five years.

    Money is not the end all be all. A balance must be struck.

    Thanks for the reminder.

    TPP

  • VagabondMD

    I am committed to bringing my “B-game”.

    http://diversefi.com/2018/05/18/why-i-usually-bring-my-b-game-2/

    No reason to reason to work myself to death.

  • GasFIRE

    As always it comes down to how you value time vs money. Even in medical school I knew I was going to lean towards the time side of the equation. When I was working full time in a large group practice I found I could meet my family living expenses and retirement savings on half my income so any opportunity to cut back was going to be an easy sell. The good thing about large group practices is you can always find someone who values the $$ more than time. That makes it easier to find ways to cut back the workload. I’ve done the fractional FTE system (I was at 0.7 when I eventually left my group) and have outright paid for others to take some of my call duties. While I’m all in on working less, I was glad there was always someone who wanted or needed to work more.

    • I was one of those happy to work harder for more money early in my career. I’ve only recently come to realize that it’s OK to take the foot off the pedal and enjoy life a little more.

      Cheers!
      -PoF

  • billy

    Went from 6 calls/month to no calls and negotiated a out time of 430 pm M-F. yes I make ~50-150 less than my call taking anesthesia peers, but this is also the first Memorial day weekend in 6 years that I’m free, and its a weird but good feeling of not having to check the call schedule to see if I can join non medical friends on weekends. This also probably decreased my possible burnout that I felt starting to affect my happiness. At some point, we make enough money (still on the path of maxing out all retirement accounts, and contributing to a healthy taxable account), but we will never get back time we couldve spent with family and friends.

  • I have used this concept to justify me cutting back some from my full time work. I think that the money I would have made is my least valuable dollar (gets taxed at my highest marginal rate). But the main thing is that it will allow me to prolong my career (if choose to) much longer because I reduce the risk of burnout.

    The fixed cost thing is very important to consider. That’s why at some level of part time work it really does not make sense (have to maintain board licensure, insurance coverage, and of course money to keep the lights on).

    Happiness in the end is the ultimate factor and should trump any decision to work harder or less regardless of financial implications

  • This was a timely post for me. With FI, number 4 really can be the start point, and then work back to how much money and satisfying work you need to make you happy. That said, the marginal tax rate psychologically eats at me. Logically, I can come back to the fact that I am happy doing what I do and the hours mesh well with the rest of my life. However, emotionally, when I know that more than half of what I make is taken, it leaves a bad taste in my mouth and decreases my satisfaction with work. Each time I get a grip on my emotions, let logic prevail, and move on – the taxes here in Canada go up further. The party now in the lead for our provincial election is talking about a 56% marginal rate plus we already have a 5% doctor fee clawback (which is basically the same as a “doctor tax”) to give a 61% rate. Definitely diminishing returns on time invested and many docs here are starting to openly talk about re-balancing work/life, now that the exchange rate keeps changing. Maybe better for us in the end.

  • FrugalMD

    I disagree with #2. The marginal utility of time and money always come into play. However, if your marginal total tax rate is say around 50% state plus federal and FICA, realizing you have to trade 2x time to get 1x money is a huge factor, and absolutely could be the deciding factor when considering taking on extra work at such a high marginal rate. Even if you strongly value money more than time, you also might value not getting ripped off on both fronts and choose time.

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