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.
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.
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Rule # 2: Always Max Out Retirement Accounts
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.
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.
[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!