Gaining wealth like a Boss

By: Neil Pithadia

Realize that there is a critical difference between “getting rich” and “gaining wealth.” To me, there is a big distinction.  Allow me to explain, being rich means having a posh lifestyle, leasing or financing a newer car/home/etc.  Being wealthy means having a diverse assets, lack of debt, financial freedom and maneuvering to sweep up the next big investment should capital be needed.   Wealthy tend to see their resources not as scarce, as someone rich would, they have a sole purpose with their assets and optimize their resources to work with them.

In the healthcare arena this is extremely prevalent. Case in point, a buddy of mine, an Administrator of Orthopaedics, the first week on the job he botched Payroll.  The Staff and Doctors would miss their first paycheck by two days after the beginning of the week.  On day two he received calls not from the Staff, but rather from the significant others of the doctors yelling on the phone.  One in particular asked “How are we supposed to make our boat payment?” After hearing this story, it then dawned on me, just because they were physicians (hell, orthopods at that) did not mean they knew how to be wealthy.

Here’s a clip from Chris Rock (If you don’t know Chris, I should you warn you there is a lot of profanity in his routine (NSFW) and portrays different cultures in edgy lights, so if that is not your thing, do not watch).

Before going through this journey, you should be aware of the following:

1.) To the average person, wealth generation never occurs to them.  Out of sight, out of mind.  The average person does not know anyone wealthy and sees it as unattainable.

2.) Procrastination. You need to decide to be wealthy and put in the effort.

3.) Inability to delay gratification.  Most people have a temptation to spend all they can make and borrow.  It takes discipline to become wealthy.  If you cannot save money and practice budgeting, you will NEVER become financially independent.  It is critical to learn how to save.

4.) Understanding time.  This concept of time value of money is crucial.  Your largest resource is time.

So for those of you that want to be “rich” and lack the discipline it takes to become wealthy, or are too lazy to read and inject these tips into your own financial management plan, do not proceed.  You will waste your time.

I’m done preaching.  Here is our Roadmap:

1.) Creating a Financial Plan/Budget. If you have not read about a financial plan, I urge you to start here

2.) Optimizing your current resources

3.) Focusing on Retirement

4.) Investing

5.) Automation

Realize that this will require discipline, focus and time and reading.  Most 20-30-somethings believe they have to be experts in order to manage their money.  That is not true.  The most important thing to realize is to stop procrastinating and just start NOW, no matter how little you can set aside and invest in, the concepts you learn now will empower you to wealth-creation for the future.

As I just noted the two powerful take home points are the concept of time and the concept of delayed gratification or savings.  An investor with $10,000 who saves $5000 a year expects to have $167,000, 15 years from now if (s)he gets an 8%/year return.  I often hear naysayers, well those rates are historical and not possible.  Not true.  Just in 2012, the S&P 500 annual return was 16%[1].  Most strong indices were around 10% for 2012.

However, if this investor can increase that return by 1%, (s)he would have a total of $182,000. However, if (s)he could increase his savings by just $2000/year, (s)he would end up with $222,000. So realize the impact of saving at a younger age.

The opposite is true for a mature investor.  Let’s take the example of our Physician Assistant from our examples of professionals and their plans.

Physician Assistant

She is currently saving $42,000/year and say she gets an 8% return on her portfolio. This will only get her to $1.524 Million. If she saved another $2K/year, she would end up with $1.645 Million, but if she could increase her return by 1%, she would end up with $1.642 Million. So here it is a bit negligible.  The best thing to do is maintain the position in lower risk investments.  You will often see older people reduce riskier investments, i.e. migrate from stocks to bonds.

When to start

Ummm….NOW!

So the bulk of my younger healthcare readers, I hope you realize the importance of time and how crucial it is to start early.  You will ultimately need to decide when to start this path of wealth-generation.

Steps to Increase Savings Rate

The following are some steps you can take to increase your savings rate:

1) Increase the amount of money you make. It is much easier to save 25% of $100K than it is to save 10% of 40K, even while paying a higher tax rate. This can be accomplished by further schooling/training to upgrade your skills (which many of you are currently doing), changing jobs when opportunities to make more money arise, and taking additional jobs/working overtime.

2) Save the raises. Cost of living and standard raises are frequent with many jobs. Although we often need to gradually increase our spending to maintain our lifestyles, we do not need to increase our spending as much as our income increased.

3) Keep your fixed expenses as low as possible.  The key to forming our financial plan (http://iwillchangehealthcare.com/financial-plans-of-healthcare-professionals/) is to reduce this. The less you are obligated to spend, the more you have the option to save. Then you can make conscious decisions between spending and saving each month. Avoid contracts you can’t get out of if your finances turn sour, such as cable, cell phone, boat payments, large mortgages etc.

4) Beware the Big Two-Your house and your cars are where you can save a LOT of money. Most people calculate out their mortgage payment when they opt for a bigger, nicer house, but they forget that they also have to pay more in taxes, utilities, repairs, landscaping, furnishings, and upgrades on that bigger, nicer house. Because your house is a big ticket item, saving 25% on that will free up much more cash flow than eating out 25% less. To make it worse, most of these expenses are fixed expenses.

Likewise with cars.  A great deal of money is lost buying and financing these depreciating assets. The older you buy a car, the less you will pay in financing costs, depreciation, insurance, and sometimes even repairs because you may be less likely to repair unimportant features of an old car, such as dings in the bumper or a power mirror that works poorly. The savings in repairs and gas of a new car do not come anywhere close to overcoming these costs.

5) The Frap Factor- Even small things can add up over time, especially when considered in light of decades of compounding. The classic example is the $5 Frap. If you save that $5 a day ($150 a month, $1800/year) and earn 8%/year on it, it will be equal to $466K in 40 years.  Now for many, this may be worth it.  I’m a coffee aficionado and need to have my cup or three of java a day to get me by.  The key here is to consciously decide what to spend your money on and maximizing its happiness so that you are not left with a void to fill, ending in a delayed gratification paradigm.

6) Calculate your savings each year- Studies show that we consciously and subconsciously strive to improve in those aspects which we measure.  There are great products out there streamline your financial processes.  Check out Mint (https://www.mint.com/what-is-mint/).[2]

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