How to Fix Your Financial Problems – The White Coat Investor – Investing & Personal Finance for Doctors

July 6, 2020 Cesar Skaff

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The Fed does a survey every three years about household net worth in this country. The most recent data looks like this;

Median and average net worth by age

Under 35: Median net worth: $11,100 (average net worth: $76,200).
35-44: $59,800 ($288,700).
45-54: $124,200 ($727,500).
55-64: $187,300 ($1,167,400).
65-74: $224,100 ($1,066,000).
75+: $264,800 ($1,067,000).

The Median Net Worth

The overall median household net worth (prior to the COVID associated downturn) was $97,300. The average is higher, at $692,100, but the median seems a lot more relevant to this conversation. As you can see, the typical trend is to start out life relatively poor and acquire wealth as you go through life.

So what’s the problem? The problem is that $200K is a terribly low net worth for someone in their 60s. And HALF of people have a net worth LOWER than that!

Now don’t get me wrong. $200K is a lot of money. It can buy a totally tricked out wakeboat or even a couple of nice Teslas. But it doesn’t go very far when placed up against the greatest expense of your life–paying for your retirement. In fact, Fidelity estimates that a typical retiree will spend $285K just on out of pocket health care expenses. Obviously that’s totally bogus, since, as you can see, the median retiree doesn’t even have $285K. But people might spend it on health care if they had it!

Using a ballpark withdrawal rate of 4% per year, a nest egg of $200K can only produce an income of $8K/year, or $667/month. But that net worth figure is NOT a retirement nest egg. It’s a net worth. Everything you own minus everything you owe. It includes the value of a house, cars, household possessions and other non-income producing assets. I don’t know what the median nest egg is, but I think it’s safe to say it is a five-figure amount, which, when compared to the cost of retirement, is essentially indistinguishable from zero.

In fact, Social Security is far more important as a source of retirement income. The average Social Security benefit in 2020 is $1,503. That’s still not a lot of money, but it is far more than $667, or more likely, $300 per month. To make matters worse, those who never acquired a six-figure nest egg likely don’t have their tiny portfolio invested in a way that they can even take 4% a year from it and expect it to last.

The big problem here is that the median person never built any significant wealth over their entire lifetime!

The Cause of the Wealth Gap

A recent article on CNN discussing these figures suggested that most of this wealth comes in large part from home ownership and inheritances. If you have spent any time whatsoever studying wealthy/rich/comfortable/financially secure/financially independent people, how they got that way, and how they stay that way, you know that most of their wealth IS NOT due to home ownership and that very little of their wealth came as a result of an inheritance.

For the most part, a home is a consumption item. Sure, it pays a “dividend” of saved rent, but it requires insurance, maintenance, occasional renovation, and property taxes just to maintain its value, and in the long run, the value of homes basically just keeps up with inflation. Long-term home ownership does help build wealth, but it’s a pretty minor effect, so minor that I think it is probably better said that it helps maintain wealth, not build it.

Stanley and Danko’s classic The Millionaire Next Door noted that only 20% of America’s wealthy became that way through inheritance. 80% are “first-generation wealthy.” Dave Ramsey’s study of the wealthy showed that only 21% of millionaires received an inheritance AT ALL and just 3% received more than $1 Million.

Rather than inheritances and home equity, the wealth of most millionaires is found in their businesses and their investments, both within and outside of retirement accounts. Placing your focus on those items is what really gets you on the wealth train.

How to Build Wealth

So what does build wealth? I’m a wealthy person. I know many wealthy people. Over the years I have had the opportunity to peer deeply into the finances of the high-income people who read this blog and listen to my podcast. Some are wealthy, some are not yet wealthy, and some are probably never going to be wealthy. While there are some variations, the formula for building wealth is surprisingly universal. It looks like this:

Get a high income
Carve out a significant chunk of that income to build wealth rather than spend
Make sure your money works as hard as you do
Avoid the loss of your money

Not necessarily easy, but really quite simple. When people have financial problems, it is a result of one of these steps not being done properly. If you want to fix your financial problems, figure out which step you’re messing up on and fix it.

How to Fix Your Financial Problems

money problems

Let’s address each of the four types of financial problems and figure out what YOU can do about each of them.

Side note: Notice that I am not saying that financial problems are 100% caused by your lack of attention to them, but since there is little sense worrying about external factors you cannot control, this article will only focus on what the individual can control. I am intentionally NOT spending another 2000 words right here in this blog post discussing the effects of historical privilege (although I easily could) because they are outside of your personal control when it comes to your personal finances. Work on that at the voter box, in conversations with those outside your household, and with your charitable contributions. Not in your monthly financial meeting with your spouse when you work on your own financial problems. Read that paragraph again before sending me hate mail or leaving hate comments.

# 1 An Income Problem

The vast majority of Americans have an income problem. They simply do not make enough money to build any significant amount of wealth. Now it doesn’t take that much income to really build a lot of wealth. Frankly, six figures of income is more than enough to become a millionaire by the end of your career. But what percentage of American households have a six-figure income? Only about 30%. The other 70% frankly have an income problem, at least if one of their goals is to build wealth. It isn’t that one cannot build wealth on a five-figure income, it is simply much harder. Even for the 21% of households in the $100-200K income range, boosting their income will also aid their quest to build wealth for a secure retirement. Most of our readers come from the 8% of households with a $200K+ income, and thus don’t really have much of an income problem. But that is not the case for most Americans.

So how do you solve an income problem? It is my contention that most people dramatically overestimate the difficulty of doubling their income. Convince yourself that it can be done, and you’ll likely accomplish it within less than 5 years. It might involve doing work you don’t want to do or working more than you want to work, but it can be done. Here are some things to consider if you have an income problem:

Start looking for another job. This does two things. First, you are likely to find a job that pays better than your current job. But even if you don’t, you will acquire the information you need for # 2 below.
Ask for a raise. Lots of people are actually terrified to ask for a raise. I don’t know why. Are they afraid that their employer will be so offended by it that they will fire them or cut their pay? That’s a silly concern. So is the fear of rejection that handicaps so many of us. People who ask for raises are far more likely to get raises. Remember the best way to get a raise is to increase your value to your employer and then make sure your employer knows what your value is. Obviously you never get 100% of what you provide for the company (if there is no profit from your work what’s the point of an employee?), but some of that extra value you produce should flow back to you.
Work more. Overtime is great. You already have and know the job. You just do it more. And, in many cases, you actually get paid for that additional work at a higher rate! You can also do similar work for a second employer.
Increase your value in the workplace through education, training, taking on more risk, or doing more unpleasant work. We all know someone who went back to school to become a PA instead of a medic. But being willing to start a business cleaning out septic tanks might do just as much for your bottom line!
Start a side gig. The main problem with working more is it leads to burnout. A side gig, on the other hand, should be different enough that it may actually help burnout. Sometimes a side gig turns into the main gig if it makes you happier or becomes more profitable.
Own the business. Employees never get paid 100% of what they’re worth. But business owners with employees get paid > 100% of what their individual work is worth. So start a profitable business. Forty-seven percent of millionaires are business owners. However, only 11% of Americans own a business. Correlation may not be causation in all cases, but it probably is here.
Seek out passive income. Very little “passive” income is 100% passive, and this area blurs significantly into investments, but passive income can be invested to grow wealth nearly as easily as earned income and spends exactly the same.

# 2 A Spending Problem

So if 70% of Americans have an income problem, most of the rest (and many of the 70% too) have a spending problem. A high income by itself does not build wealth. You have to set some of it aside to build wealth. How much? It depends on how quickly you want to build wealth. But even if you’re content to build it over an entire career, you still need to be using 15-20% of your gross income to build wealth. Don’t be ashamed that you spend too much. It’s quite normal. But you don’t have to be normal. Here are some ways you can spend less money:

Take your money for wealth building off the top. What never hits your bank account is much harder to spend.
Live on a written budget. A budget does not limit your freedom; it enables it.
Stop spending money you don’t have to impress people you don’t even like. A massive percentage of your spending goes to things you don’t even care about. Cut that stuff out.
Stop using credit cards. Studies are clear that the less psychologically painful we make spending, the more that is spent. If you have to fork over green stuff every time you want something, I guarantee you will spend less. And yes, that includes the benefits of miles and credit card rewards. Personally I use credit cards, so don’t let me give you a guilt trip. But I’m not the one with the spending problem.
Stop paying interest. Ever calculated what percentage of your income is going toward things you already bought? Imagine if that money was going toward that 15-20%+ you need to put toward building wealth. It would be a lot easier to get your savings rate up there, wouldn’t it? Don’t buy stuff you cannot afford. How do you know if you can afford it? Well, if you have to finance it, by definition, you can’t afford it.

# 3 An Investing Problem

In my experience, very few people are sunk by a stand-alone investing problem. If you have managed to avoid having an income problem or a spending problem, you probably don’t have an investing problem either. But a few might, and many have both an income problem and an investing problem, or a spending problem and an investing problem. Here are some ways you can help fix an investing problem.

Get a written investing plan. 2/3s of my followers still don’t have a written investing plan despite the fact that I’ve been harping on it for years. Imagine what percentage of Americans doesn’t? 95%? More? If you fail to plan, you plan to fail. If you need help, we have an online course specifically designed to help you cheaply and quickly get a plan in place. This week it’s even on sale.
Get good advice. While there is plenty of bad advice out there, a larger problem is that people don’t get advice at all. While it is entirely possible to learn to be your own competent financial planner and investment manager, most people would benefit from getting some solid advice, at least at the beginning.
Pay a fair price for advice. Good advice at a fair price. One investing problem that I do see frequently among my audience is that people are paying too much for good advice. Since good advice is available for a four-figure amount per year, it seems silly to be paying $30K, $40K, $50K or even more for that service.
Avoid investing strategies that have been shown not to work well. The data is pretty clear that using actively managed mutual fund managers (or worse, picking stocks yourself), timing the market, chasing performance, or collecting investments doesn’t work very well compared to the alternatives. Learn what works and do it. Pick a reasonable investing plan, fund it adequately, and stick with it for the long term.

# 4 A Losing Money Problem

A surprisingly high percentage of people lose money that they worked hard to earn, save, and invest. Here are some of the ways you can lose money and what you can do to avoid them.

Divorce. The wealthy tend to marry once and stay married. Remember Date Night is your best asset protection move.
Marital Financial Discord. While divorce is obviously huge (since it cuts both your assets and your future income in half while increasing the overall cost of living), not being on the same financial page while being otherwise happily married is also a very easy way to lose a lot of money. Marital finances should be managed together in order to build wealth. Many “financial problems” are really relationship problems. Fix the relationship and the finances will take care of themselves.
Lawsuits. Carry adequate professional and personal liability insurance. Have at least a basic, cheap asset protection plan.
Death of a bread-winner. Carry adequate term life insurance.
Disability of a bread-winner. Carry adequate disability insurance.
Loss of valuable property. Carry property insurance.
Speculative investments. Don’t speculate. Putting 40% of your net worth into Bitcoin or your brother in law’s new business is stupid. Don’t do it.
Fraud. Do due diligence and pay attention to your business and your investments.
Addiction. Both gambling and drugs can destroy finances in a hurry. Get treatment for yourself and those you care about.

Americans build far too little wealth, no matter their race. We all have money problems. The sooner and more effectively you address yours, the sooner you will be on the path to financial security.

What do you think? What are your biggest financial problems? What are you doing about them? Comment below!