When Your Income Becomes Your Enemy

What’s the first thing that comes to mind when you hear the question “How do you get rich?”

You might envision someone winning the lottery or receiving a large inheritance, but the most common and likely response is something along the lines of “make a lot of money.”

If you want to be wealthy, and don’t have a rich uncle or 1 in 100 million luck, you’re best off working hard and earning a boatload of money.

Of course, earning money is only half of the equation, but it’s the sexier half, so you probably didn’t immediately come up with “save and invest most of your earnings.” We’ve talked about living in half of your takehome pay and the benefits of relative frugality.

Today, we’re going to explore what it’s like to have a high income, and how a high income can actually get in the way of wealth-building.

 

When Your Income Becomes Your Enemy

 

As a physician, I earn a high income. As an anesthesiologist, I’ve earned more than most physicians, but even the lowest-paid specialties now average at least $200,000 per year for full-time (often 50 to 60+ hours a week) work.

 

Many readers of this blog, whether physicians or not, are aiming for a fatFIRE post-work existence, and earning six-figures in a variety of careers.

I have absolutely enjoyed and benefitted from a generous income, and I don’t expect any sympathy for high-earning individuals. That’s not what I’m going for here. What I do want to impart, based on what I’ve seen and what I’ve learned, is that a high income most certainly does not guarantee financial success. At times, your income can become your enemy.

 

A Whole New World… of Investments

 

No one, no matter what their income, is immune to making a bad investment. In fact, the poor and underinformed are preyed upon by payday lenders, infomercials promising riches, and unsavory websites offering get-rich-quick schemes.

High-income individuals are also targeted, and the targets and the ammunition are larger and more powerful, respectively. The more money you have, the more money you have to lose.

The higher your income, the more risks you’re able to take with your money, or it may seem that way, at least. Nevertheless, I’ve worked with physicians who have had to file for personal bankruptcy after being over-leveraged in business and real estate investments that turned sour.

If you have a net worth of $1 Million or more, excluding equity in your primary home, or you earn more than $200,000 as an individual or $300,000 as a household, you are by definition an accredited investor.

 

 

Accredited Investor Status

 

As an accredited investor, you’ve either got a net worth of a million dollars or more, excluding your primary home, or you’ve got steady income of at least $200,000 as an individual or $300,000 as a couple.

You’re legally able to make investments that aren’t available to just anyone. That exclusivity might make you feel special, like you’ve earned a privileged status that the serfdom can never touch. Your wealth can only snowball with these newfound opportunities, right?

Not so fast! Think about the reason the status exists. Accredited investor status gives you access to investments with potentially higher reward but paired with concomitantly higher risk.

The reason you’re given access to those investments is that our benevolent leaders have deemed you to be in a position to be able to afford a substantial loss of principal.

I’ve made a handful of investments in crowdfunded real estate deals based on my accredited investor status (and there are some crowdfunded investments available to everyone via places like FundRise and Realty Mogul), but I’ve made them knowing that the generous returns are far from guaranteed.

 

Friends and Family… and Business?

 

We all know it’s best not to mix business and pleasure, but many a physician or other high-income professional has been targeted as a source of funding by family and friends for business ventures that a bank wouldn’t touch with a thirty-nine-and-a-half foot pole.

How many failed business ventures have your coworkers and classmates been involved in? You can stop counting when you start using your toes.

When your college roommate or not-so-rich uncle is looking for seed money for a business idea, who will he turn to? The person he knows who has the highest income, of course. That might mean you.

reward credit cards
Business Cards
Before you even considering investing, consider the fact that even a successful business can ruin friendships and strain family relations. A failed business is even more likely to create ill will, and something like 90% of new businesses will fail.

As a high-income or high-net-worth individual, you will be targeted. Why did Willie Sutton rob banks? For the same reason that Bernie Madoff went to people like Steven Spielberg, John Malkovich, and Kevin Bacon? Because that’s where the money is.

When you earn less, you will have a lesser opportunity to build substantial wealth, but you’ll also have fewer opportunities to squander it on risky investments.

 

A Whole New World… of Toys

 

If you had all the gold and jewels from that cave in Aladdin — you know, the Disney movie they’ve remade that features “A Whole New World” — just think of all the stuff you could buy!

Most of us will never see riches like that, but if you’re making several hundred thousand dollars a year or more, you will be tempted to spend money on things you could never (or at least should never) dream of buying on a five-figure salary.

A Lamborghini, a mountain home you’ll use two weeks a year, a NetJets subscription, or a box suite at the stadium.

If you level up your wealth further, the temptations become more costly. Your own plane, a million dollar car, or a mega yacht like the one Arthur Blank bought himself.

While there’s theoretically no limit to how much more you can earn, the same is true of how much more you can spend.

The higher your income, the wider the options you’ll have to spend it. The more you make, the better you’ll want to get at saying No. No to yourself, maybe no to your family members, and no to savvy marketers who want nothing more than for you to transfer some of your wealth to them.

 

 

A higher income only helps you become wealthier if you increase the gap between your earnings and spending. If an extra $50,000 in takehome pay is paired with an additional $50,000 in lifestyle creep, all you’ve done is add at least $1.25 Million to the amount you’ll need to become financially independent (based on a 4% safe withdrawal rate).

 

Sedona Mansion

can you imagine the property taxes?

 

A Whole New Tax Bracket

 

It’s another good problem to have, but the more you earn, the higher your marginal and effective tax bracket will be. Depending on where you live, when you have earned income in the upper six-figures, half of or more of every additional dollar you make can go towards income taxes.

With a seven-figure income, you’ll have to decide if it’s worth an extra six figures annually to you to live in a place like California, Hawaii, Minnesota, Oregon, or New York City. Imagine the palace you could have in Florida if you were putting $10,000 towards a mortgage payment instead of state income taxes.

That brings us back to the previous section on lifestyle inflation, but with that much money, you could probably buy four nice places in Florida (or Washington, Texas, South Dakota, Wyoming, Nevada, or Alaska) and rent out three of them to cover the costs of paying for all four. Think about that!

You should never let the tax tail wave the dog, and all else being equal, I’ll gladly take an extra dollar of income even if I can only keep half.  Just realize that tax management and mitigation becomes more important as your income increases and can give you new things to think about, like where to call home, for example.

 

Ethical Dilemmas

 

Your income can become your enemy if it causes you to do or say things that you might otherwise not do.

Conflicts of interest are highly prevalent when it comes to money matters, and many professions are subject to them. They exist to a varying degree, and some people are more susceptible to them than others, but no one is immune, whether consciously or subconsciously. Conflicts of interest can and do influence our thinking and behavior.

I’ve got two jobs. Job A as an anesthesiologist and Job B as a blogger. Neither are immune to conflicts of interest.

 

Conflicts of Interest in Medicine

 

Some physicians deal with significant conflicts of interest. If pay depends on production, as it often does, there is a financial incentive to do more procedures. If pay is tied to patient satisfaction, as it sometimes can be, there is a financial incentive to acquiesce and prescribe an antibiotic or pain medication that may not be indicated.

I am not saying physicians routinely respond to these incentives (and I’m not saying we never do, either), but the incentives absolutely exist.

In my job A, I’m salaried with a small group production bonus. Since I can do little to influence production (cases are scheduled by surgeons), the conflict here is small. I do have the ability to cancel a case if the patient is not medically appropriate or optimized for the procedure, and I guess that gives me a tiny incentive to avoid canceling a case.

On the other hand, canceling the case lowers the risk of an adverse outcome, and I have both an emotional and financial incentive to avoid those. I did take that Hippocratic oath to do no harm. A canceled case at the end of the day might also get me home earlier, so there can be an incentive to lean towards canceling a case late in the day as opposed to first thing in the morning.

A small conflict may exist as to whether or not I offer the patient a peripheral nerve block. On one hand, if the procedure is potentially painful, the block may give the patient better pain relief and patient satisfaction. I would also create a few units of production by doing it.

On the other hand, I’m exposing the patient to additional risk of nerve damage or infection, however small that risk is, and increasing the likelihood of a lawsuit against me. Sharif Floyd sued the team that worked on his knee for $180 Million, blaming effects from the peripheral nerve block for his declining career with the Vikings.

A block also takes some time and effort on my part, and depending on the timing, might delay the start of the surgical procedure by a few minutes. On the third hand — third hand? — the block may be the difference between the patient requiring only light sedation versus a general anesthetic and the risks associated with general anesthesia. The more diseased the patient’s cardiopulmonary system is, the more important the block could be.

I mention these factors — and there are many more that consciously and subconsciously go into the decision-making process — not to give you insight into my thought process when evaluating a patient preoperatively. I’m simply pointing out that monetary and other incentives exist whether we’re aware of them or not, and the greater the role money can play, the more difficult those incentives can be for some to ignore.

If you’ve succumbed to lifestyle inflation and your pay drops, as is not uncommon in this era of declining reimbursements, taking the moral high road can become more difficult.

Unfortunately, some take the low road and end up in the news. These bad apples, like the pill mill operators and the willy-nilly chemotherapy subscriber, cast the entire medical profession in a poor light.

 

Conflicts of Interests in Blogging

 

In my other job, as a blogger, the conflicts of interests are actually greater and are almost certainly more influential.

I don’t feel terrible about that. For one thing, the consequence of  those conflicts altering my behavior are probably less serious than the consequences of me choosing to cancel a case or whether or not to place a peripheral nerve block.

For example, if there are two products that are equally good, and this site can profit from recommending one and not the other, I have an incentive to recommend the more profitable product.

Given our charitable mission, you are also incentivized to choose that product over the equally-good product that doesn’t benefit the site, as you know the profitable one will lead to some money being directed to charity. And that should make you feel good.

I also realize that my reputation hinges upon my recommendations, so when I make them, I’m incentivized to do what I can to ensure I’m not recommending garbage. I’m incentivized not to send you to a high-cost or suboptimal product or service when there’s a better alternative.

Have you noticed how many of my recommended financial advisors charge a percentage of your assets under management or net worth? Or how many of the recommended insurance agents are independent and not tied to one company?

I like to be reasonably transparent, and I addressed this in a post called “Coming Clean” but if you completely qualify every statement and recommendation with every possible caveat and potential drawback, the articles could sound like one lengthy, pre-emptive apology and would become unreadable.

 

Yes, I Recommend Personal Capital. No, It’s Not Perfect

 

Here’s a great example. Personal finance bloggers love to recommend Personal Capital. I love to recommend Personal Capital. If you do use it to track your investments and you have a six-figure portfolio, this site receives a referral fee. I was using it before I had any notion of starting a blog and I’ve truly been a happy customer for four or five years.

How can they offer this powerful software for free? They know that some small percentage of users will become customers of their advisory service. That is a paid service that charges an assets under management (AUM) fee.

Just as I don’t have AUM-fee financial advisors on my recommended list, I don’t recommend Personal Capital’s advisory service. It may seem contradictory, but their free software gives you tools to help you better manage money on your own, and they use it to attract customers for a decidedly non-DIY financial planning service.

If you are tracking a sizable portfolio with Personal Capital, you can expect to be contacted by email and/or phone by an advisor who would like you to sit through a virtual presentation that describes how their approach to sector weighting can lead to increased returns, at least based on past performance as presented by their advisors.

You can ignore them, but they’ll be on you like the paper boy in Better Off Dead. They want their two dollars!

You can politely say no thank you in no uncertain terms, and they’ll eventually leave you alone but you’ll remain on their mailing list. As with any list, you can always unsubscribe.

 

Personal Capital Unsubscribe

 

Or you can do what I did and take them up on the offer to walk through your portfolio and see their recommended changes. I took delight in impressing the advisor with my knowledge and rationale, and it was clear to him early on that I was very unlikely to become a paying client.

So that’s the disclaimer and disclosure based on my perspective on Personal Capital. I couldn’t possibly say all of this every time I mention them, but there it is.

 

Make Sure Your Income Remains Your Ally

 

Money can be used for wonderful purposes, and I’m never going to opt out of or advise against increased income.

When you understand the ways in which your income can become your enemy, you are better prepared to hold onto that income and use it in ways to benefit yourself, your family, and your fellow man.

 


Track your investments for free with Personal Capital. That's how I track the PoF portfolio

 

In what ways have you seen a high income become the enemy? What do you do to keep your income an ally?

18 comments

  • One epic post, POF!

    I’ve gone the same route with many of my decisions.

    Being a regional anesthesiologist, I have to say that I don’t routinely offer blocks on professional or collegiate athletes, and on the rare occasion that I’ve performed one in that setting it has been after a very long goal-setting discussion.

    Conflicts loom large in many areas. In the blogging world, I’ve turned down countless companies and products that wanted to pay me to advertise on the site because I couldn’t recommend them. I have the same view on advisors and insurance agents that you do as well. They have to meet my gold standards to make it on my site (for advisors this means fee-only, fiduciary, experience working with physicians, and flat-fee).

    The easy thing to do is to let others on, but it’s not what is best for the readers, and having been hosed by the financial industry myself I respect that you try to protect people, too.

    Thanks for being a leader in transparency.

    TPP

    • When the Floyd story broke, I heard a number of other anesthesiologists say the same thing — no blocks for athletes except in a rare circumstance. I pretty much never encounter these patients in the northwoods, so it’s been a non-issue for me.

      Like you, I have declined a number of advertisers, as well. I could make more money recommending firms that charge their clients more and therefore can afford a bigger advertising budget, but I value my reputation over making some more money that I don’t need.

      Cheers!
      -PoF

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  • A paycheck is like a drug. It is so easy to build up a tolerance and dependence. Next thing you know you can barely make it to the next fix. And you need more. And you will do anything to get it.

    Incentives change physician behavior. Absolutely. We have seen it in our network. Offer a $10K incentive for such and such. Poof “such and such” behavior skyrockets. It is amazing. Especially for some who already pull in seven figures. Really, do you really need that extra $7k after-tax money? It is just human nature.

    Unless doctors want to be forever, HENRY (High Earner, Not Rich Yet), they need to convert income into wealth/assets. There is a huge difference between the two. It is amazing how many doctors don’t even know their savings rate or net worth. You can’t manage what you don’t measure.

    “Make sure your income remains your Ally.” That sounds like a great title for a blog post – sponsored by Ally Financial, Inc. of course! I bet Ally Bank/Ally Invest has an affiliate program. 🙂

  • There is definitely truth to the “MO Money MO problems” song.

    There are a lot of things that high income earning penalizes you for (the last dollar you make is taxed so high, for instance, that I realized why I am I killing myself working so hard to get it when the government taxes almost half of it. This allowed me justification to cut back my clinical hours by paying for coverage).

    Great points about conflict of interest as well. In medicine especially there are ways that unscrupulous docs can abuse the system (and unfortunately have as there are various news stories periodically exposing such individuals).

    As a radiologist, I have advised providers choosing less expensive tests rather than the originally ordered test (such as an MRI) because it is better for the patient and addresses the clinical question better. I don’t think about the impact it has to my financial bottom line, it is just the right thing to do. I know if I truly had no morals and was money driven every report I do on a study could postulate on every possible diagnosis under the sun and ask for multiple studies to exclude them. The clinician would likely have his or hands tied and forced to order these tests. Does this happen in real life? I’m sure some do it. Its just not for me and I make plenty of good money without needing to pad my stats.

    I have been approached by some friends for money lending and I will tell you it is hard to deal with because it seems like a lose-lose situation either way. Money lent changes the relationship immediately. So expect any money you lend to be like a gift. If you get paid back it’s a bonus.

    • You’re right about lending money to friends or family. Consider it a gift. Best not to have to make that kind of decision at all. Fortunately, I haven’t been approached for money despite my high-income job.

      Cheers!
      -PoF

  • temporaryMD

    Great post POF!

    I’d like to add the issue of high income turning into golden handcuffs. Even if we avoid the temptation of running faster on the hedonic treadmill, it can be hard to walk away from a high-paying medical career–even when that career no longer serves us. As an early career physician grappling with burnout, it’s very difficult to imagine giving up such a lucrative career, even though it’s a source of so much dissatisfaction.

    Thankfully, you, WCI, and others have paved the way for a solid financial education for physicians so that at least we have prepared ourselves to have options if/when it’s time to walk away from medicine. Thank you for all you do, and congratulations on your impending retirement!

    • Thank you for your contribution!

      Yes, the higher the income, the more difficult it is to make that decision to walk away. I grappled with that the last several years. While I don’t love the job and don’t believe I need the money, I like the job well enough to have stuck it out a few more years to build a comfortable cushion.

      I wish you the best as you battle with burnout in your young career.

      Best,
      -PoF

  • Great post. I moved from Minnesota to Colorado and in the highest tax bracket this move saves me over 5% in taxes per year. A 5% raise certainly factored in to our moving decision as a high earning household. Similarly, when you are a high income earner taxed beyond 50% on every dollar you make I 2nd the comments by others that I think about it differently. Is it really worth the extra stress or work in cases where more earning is the only motivator and I will only make 50 cents on the dollar or less? It gets strange the incentives and tradeoffs when you reach high income.

  • Great points indeed. We must understand the enemy that’s within us. Making money is never a bad thing. We can all be more effective altruists if we all made more money and donated to effective charitable causes.

    I guess it boils down to the “why” and motivation behind making so much money and if doing so causes more harm than good.

  • The concept of “the last dollar being taxed the highest” is real. When I realized I was at the point that growing my business meant the government was going to get 50% of every dollar, I was like “why bother”. It affects the level of RISK in your investments, too. If you’re going to risk 50K or 100K, and you calculate even if this WORKS, taxes will take half, is it really worth the risk? That has affected a lot of my investing decisions. You really can’t beat the slow and steady return of stock indexes over time, and you have some tax options with stocks, too (tax loss harvesting, etc).

  • Nick

    Ha, I recognize that house in Sedona and always think the same thing when i go there.

  • Lynne

    I’m not even a physician, but have often been hit up for loans from those who don’t manage their money effectively, and figure I have it to spare. Fortunately none of these entreaties have come from someone I cared about (not in the past 17 years anyway), so I’ve learned that it really doesn’t matter if I say yes or no because the person is going to find a reason to get mad at me and disappear anyway. So by saying no I keep my hard earned cash.

    There’s usually a reason why people hit up an individual for money. It’s usually because they are a poor credit risk, tend toward defaulting on debts, and regular lenders won’t touch them. The bulk of the remainder are often scammers, and only a small minority will actually keep their promises and repay. Life is too short to deal with this kind of hassle. Gift to people you care about if desired, but never expect to get repaid.

  • DrTanstaafl

    You left out the biggest way your income is your enemy. It’s harder to keep your kids grounded and instill a good work ethic. They learn from their peer group that “vacation” should be a ski vacation in Switzerland, every one gets a car when they turn 16(and not used,thank you!). It takes a lot of work to counteract that.

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