While seemingly imperative for society, becoming a doctor or lawyer is one of the worst career choices if you desire to build wealth. Trust me, there are A LOT of broke doctors and lawyers!
Everyone with cancer needs a good doctor, and someone being sued desires competent general counsel! This article is not to downplay the importance of these professions!
Nevertheless, what do you call a thousand lawyers chained together at the bottom of the ocean? A good start!
Income Isn’t Wealth
The whole reason this sited is called “Wealthy Diligence” is because we should all be striving to build wealth, not a large salary income.
Wealth is fundamentally different than income. Income is simply how much money you make in a given year. Wealth is the market value of your income producing assets.
Study this diagram below for a deeper understanding! This is the single most important image for building wealth to ever be created! Thank you Robert Kiyosaki!
Wealth is stored in your Asset section of the Balance Sheet. Income is stored on your Income Statement.
Notice the difference between a wealthy person and a rich, middle-class person?
A wealthy person creates income by leveraging their assets, while the middle-class uses their income to generate liabilities.
Wealth equals income-producing assets. Those assets generate income, and that income is used to buy more assets. Thus, wealthy people create a positive, asset-income spiral!
So, what are assets you want to own?
- Rental Properties
- Fixed-Income Securites
What are things you don’t want to own (liabilities)? Anything that doesn’t create income or depreciates in value!
- Primary Residence
- Credit card debt
- Student loans
- Anything with a freaking motor!
According to the Association of American Medical Colleges, the average cost of tuition at a public college costs $36,755.
The average cost of a private college costs around $60,000. Keep in mind, this is just the cost of tuition.
This does not account for textbooks, rent, food, transportation, and other miscellaneous expenses that will inevitably arise.
For example, the University of Iowa recommends budgeting $12,500 for food and rent, but Harvard recommends budgeting $29,613.
NerdWallet found “Law school graduates finish school with an average student loan debt of $145,500, according to the most recent data from the National Center for Education Statistics.
That total includes student loans that law students took out for their undergraduate degrees.
A student loan balance of $145,500 would cost $198,700 if repaid over the standard 10-year plan, assuming current interest rates.
The average law school loan payment for that amount of debt would be $1,656 a month.”
“The average medical school debt rose to $178,000 in 2012. By 2016, the average medical school debt was up to $190,000, with about 25% of graduates carrying debts higher than $200,000.”
Delayed Workforce Entrance
Beyond the ludicrous costs of higher education for medical and legal professionals, every year in school is a year not spent in the workforce.
This represents a HUGE opportunity cost, and it destroys the power of compounding interest. It’s not uncommon for doctors to begin their career after age 30!
The smartest career choice for building wealth is a blue-collar trade. I’m not talking about construction laborers (there’s nothing wrong with this job either).
No, I am talking about electricians, plumbers, welders, HVAC technicians, and pipe fitters. Here’s a funny opening to one of my favorite books, “The Millionaire Next Door”.
“These people cannot be millionaires! They don’t look like millionaires, they don’t dress like millionaires, they don’t eat like millionaires, they don’t act like millionaires-they don’t even have millionaire names.
Where are the millionaires who look like millionaires?” Well, they don’t really exist!
I know people who began skilled-trade careers straight out of high school. They were given a two-year apprenticeship, earning $40,000 per year.
Upon completion of the apprenticeship, their income increased to $65,000 per year! This means these people will have been in the workforce, with no student loans, for 12 years longer than doctors!
That’s 12 more years of compounding interest and time to build a business!
What’s the first thing most doctors and lawyers do once they graduate? They head straight for the car dealership and buy a new home!
“But, haven’t they earned the right to a new car? They just graduated from a very difficult curriculum!”
Come on, these doctors and lawyers are hundreds of thousands of dollars in debt, and they’re buying $40,000 cars and $500,000 homes!
“Lifestyle inflation refers to increasing one’s spending when income goes up. Lifestyle inflation tends to continue each time someone gets a raise.
This makes it perpetually difficult to get out of debt, save for retirement or meet other big-picture financial goals.
Lifestyle inflation is what causes people to get stuck in the rat race of working just to pay the bills.”
Doctors and lawyers are notorious for lifestyle inflation!
The great thing about being an accountant is that clients expect you to be wonderful with handling money!
On the other hand, doctors and lawyers are expected to drive pristine, foreign-luxury cars!
Would you trust a doctor or lawyer that rolled-up with a 2005 Toyota Camry? They must not be doing very well if this is the only car they can afford.
But damn, if my doctor or lawyer arrives in a Mercedes, Lexus, or Audi, they must be one hell of a professional!
There’s another great story in “The Millionaire Next Door” about a multi-millionaire, blue-collar business owner named, Mr. Allan.
“Something interesting recently happened. I discovered I was to be given a surprise present [from several close business associates}.
A Rolls-Royce for a present! It was ordered for me . . . special color, special interior. . . . [They} ordered it about four months before [I found out about it}. … Still had about five months [before delivery].
How do you go … and tell somebody who [wants to] give you a Rolls-Royce that you don’t want it?
Mr. Allan’s type of fishing includes throwing bloody fish in the back seat of his four-year-old, full-sized, American-made, non-luxury vehicle.
But such behavior is incongruent with driving a Rolls-Royce down to the lake. It would be out of place. Mr. Allan would not feel comfortable with such a vehicle.
Thus, he contended, he had to change his behavior by ceasing to fish or refuse the gift. Let’s consider Mr. Allan’s dilemma further.
His office is located in his manufacturing plant, which is in an old industrial area. An automobile like the one being offered might well be out of place in such an environment.
And, of course, Mr. Allan does not want to operate two vehicles. That would be inefficient. Mr. Allan also feels that a luxury car would alienate many of his workers.
They might get the feeling that their boss was exploiting them. How else could he afford such an expensive vehicle?”
Affluent neighborhoods are breeding grounds for high-consumption behavior. Some people refer to this dilemma to “Keeping Up With The Joneses”.
These are precisely the neighborhoods doctors and lawyers choose to inhabit!
“From property taxes to the pressure to decorate, from the perceived need to send their children to expensive private schools to the $40,000 four-wheel-drive luxury Suburban”.
It’s human nature to compete with one another, and a lot of people (especially those with low self-worth) draw their societal value from expensive consumer goods!
Ever heard of the rat race? You buy a bunch of expensive crap, and you’re forced to work a job you hate to keep paying for the junk you didn’t need in the first place!
Wealth is Relative
A doctor with a net worth $500,000 may seem wealthy when compared to a teacher with only $250,000. However, this is comparing apples to oranges.
What if the doctor earned $750,000 a year, while the teacher earned $50,000? This dramatically changes the picture!
The teacher could sustain their income for 5 years, but the doctor could not even replace their income for one-full year!
Prodigious Accumulator of Wealth (PAW)
To overcome the relativity of wealth problem, Thomas Stanley created the PAW formula.
The formula is as follows!
Age x Annual pretax income / 10 = Expected or Average Net Worth. If your actual net worth is close to the outcome, you are considered to be an Average Accumulator of Wealth (AAW).
If your actual net worth is twice or more than this calculated figure, then you are a PAW.
There is an asterisk for anyone less than 5 years into their career, or anyone that has experienced a recent, dramatic rise in their income!
For example, someone who is 35 and earning $60,000 per year should have a net worth of atleast $420,000 to be a PAW.
The research shows that doctors and lawyers are the least likely professions to be PAWs. Math doesn’t discriminate!
Uncle Sam, Your Favorite Partner
The following is another hilarious (fake conversation) between two IRS agents that I read!
“Mr. Stern: What about all those famous people we read about in the newspaper? The ones who have very high incomes?
Mr. Young: God bless them, Bob. They are our best customers. I love people who are big earners. Realized income is our salvation.
I want you to study these types. But I also want you to find out how these other types can exist without realizing a lot of income. Some of them must live like monks.
What’s wrong with these people? Why don’t they sell a few million dollars’ worth of stock and buy a mansion?
Mr. Stern: Is that why you have all those pictures of America’s highest-paid celebrities on the walls of your den at home?
Mr. Young: You bet. I love those people. They’ve got a real bad case of the “spends.” And to spend they have to have realized income.
Look at it this way. When a ball player buys a $2 “million boat, we become his partner. He will need to realize $4 million to pay $2 million for his boat. We are his partner.”
The IRS LOVES doctors, lawyers, and celebrities because they have the highest realized income. Realized income is what you can tax!
It’s What You Keep
Remember that building wealth is not just about how much you make, it’s what you keep. Taxes will be your biggest expense (by far) over the course of your life!
I did write an article called “Never Pay Taxes Again” for anyone interested!
The US has a progressive tax system, and here are the 2020 tax rates!
High earning doctors and lawyers are going to pay a majority of their taxes at the marginal income tax rate.
This means, straight off the top, doctors and lawyers are paying 37% of their income to the federal government. And, oh boy, it’s just getting started.
- State Taxes (California is 12.3% for top earners)
- Home Property Taxes (1% of property value)
- Car Registration Taxes
- Gas Tax
- New Car Purchase Tax
- Excise Tax
- Sin Tax
- Social Security and Medicare Tax
- Unemployment Tax
- Sales Tax
- Capital Gains Tax
- Inheritance Tax
- Gift Tax
Seriously, it is not uncommon for doctors and lawyers in California, New York, and Illinois to pay 60% of their income in taxes.
That cardiologist earning $750,000 only took home $300,000 after he was stopped by Uncle Sam in the back alley!
With that $300,000, doctors and lawyer still need to pay back their student loans, make mortgage payments, and car payments.
There’s a reason a lot of high income earners struggle financially! They’re not dumb (they passed medical and law school)! They just don’t manage money well on a group-level.
I’ll Never Pay Taxes
Now, contrast this to my financial position, where I will never pay a cent of taxes to the federal government once I turn 60.
I am going to make all my investments within a Roth IRA and Roth 401k. I pay all my taxes up-front, but I won’t pay a penny for the rest of my life!
Additionally, all the income I earn from this site gets reinvested back into the business. I will eventually need updated equipment, and that’s a write-off against my income.
If this site ever starts earning serious money, I am going to take all the income and use real estate as my tax shield!
A powerful strategy used by savvy real estate investors is something called a section-1031 tax-free exchange.
Named after its section of the tax code, this type of property exchange allows you to defer all federal income taxes due at the time of the sale.
You basically sell one property and move your equity to a new property without touching the funds yourself.
“A step-up in basis is the readjustment of the value of an appreciated asset for tax purposes upon inheritance.
The higher market value of the asset at the time of inheritance is considered for tax purposes.
When an asset is passed on to a beneficiary, its value is typically more than what it was when the original owner acquired it.
The asset receives a step-up in basis so that the beneficiary’s capital gains tax is minimized.
A step-up in basis is applied to the cost basis of property transferred at death.”
Simply put, whenever I die (if the tax code doesn’t dramatically change), my beneficiary is going to receive all that real estate TAX FREE! 🙂
While seemingly imperative for society, becoming a doctor or lawyer is one of the worst career choices if you desire to build wealth.
Trust me, there are A LOT of broke doctors and lawyers!
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