To Win the Savings Race, Don’t Pace Yourself

I ran my first and only half-marathon the year before I started medical school. It was a small half-marathon in Queens, and my goal from the start was to break 2 hours.

The first thing you do when you plan your training for a marathon or half-marathon is to calculate your pace. You pick your target time and then divide it by your distance to get your per-mile pace. For me, a 2-hour half-marathon meant I had to run each mile in an average of 9:11.  The goal is to run at an even pace so you don’t run out of gas. All of my training was designed to run at a 9:11 pace for as long as possible. Using this plan, I finished the half-marathon in 1:59:51.

The Tortoise and the Hare

As kids, we were all taught the story of the tortoise and the hare, one of the most famous of Aesop’s fables. After getting tired of being mocked for being slow, the tortoise challenges the hare to a race. Because of his superior speed, the hare races out to a big lead, while the tortoise plods along slowly. Unfortunately, the hare gets distracted and takes a nap. By the time he wakes up, the tortoise has passed the hare and wins the race.

We’ve been ingrained all our lives to pace ourselves. Don’t start out too fast in a long race. On tests, don’t spend too much time on any one question.

However, In the savings race, you should not pace yourself, It’s critical to start fast. By starting out fast, you’ll win the race, even if you decided to stop in the middle of the race and take a “nap”.

The Power of Compound Interest

It’s been said that it takes money to make money. This does not apply just to startup companies who rely on venture capital to survive. The same stock return will net more income on a larger portfolio than on a smaller portfolio. A 10% gain on a million dollar portfolio will earn you $100,000, while a 10% gain on a $100,000 portfolio will earn you only $10,000.

How do you get a $1,000,000 portfolio instead of a $100,000 portfolio? You start saving early. A $1,000,000 portfolio doesn’t just come out of thin air. You save as much as you can during your first few years as an attending (or even during residency), and then you can dial back your savings to a more reasonable rate and let your gains grow via compound interest.

Compound interest is so powerful that a slow start with savings is very difficult to overcome.

The Tortoise and the Hare in a Savings Race

Consider three attendings who finish residency together at age 30. The first attending, Alice, is a hare. She is aggressive about saving in her first 10 years after residency, saving $100,000 a year (a total of $1 million). For whatever reason (e.g. cutting back to part-time work), she decides to stop saving and just spends exactly what she earns, letting the savings from her first ten years grow.

The second attending, Bill, makes the mistake of rapidly growing into his attending salary and doesn’t save at all for his first ten years after finishing residency. At the age of 40, he realizes he needs to start saving for retirement. He decides to save aggressively for the next 25 years of his life, saving $100,000 a year (a total of $2.5 million).

The third attending, Charlie, is the tortoise, saving a consistent amount for his entire career. He saves $40,000 a year for 35 years (a total of $1.4 million)

Each physician makes an 8% return on their investments.

Results

Dr. Alice, despite only saving for the first ten years of her career, wins the race, ending up with $10.7 million at age 65.

Dr. Bill comes in second place, finishing with $7.9 million. Despite feverishly saving for 25 years, his slow start doomed him.

Dr. Charlie, the tortoise, while finishing with a respectable amount of $7.4 million, comes in last place.

A Penny Saved is a Dime Earned

When you save as a young attending, compound interest allows the money to grow at an exponential rate. It turns out that every dollar you save, by growing at 8% for your 35-year career, becomes nearly $15 in retirement. While Benjamin Franklin may have said a penny saved is a penny earned, with compound interest, a penny saved is a dime earned.

The “Financial Fellowship”

The key to starting off the right foot is to slowly grow into your new attending income. This concept goes by many terms. Jim Dahle at the White Coat Investor popularized the term “live like a resident.” Others have called it “live like a student”. I like to call it a “financial fellowship.”

I understand that medical training is very long and medicine is a giant exercise in delayed gratification. But the longer your training is, the more important a financial fellowship becomes. By taking two to five years after residency and living on a fellow’s salary while making an attending’s income, you will be able to crush your student loan debt and rapidly accumulate net worth.

Conclusion

If the hare were to challenge the tortoise in a savings race, he would win every time. Despite the tortoise being virtuous, plodding along and saving a consistent amount year after year, the hare will win the race by sprinting out to a huge lead. The hare could even stop halfway through the race, as the engine of compound interest would power him through to the finish line as he napped.

What do you think? Are you saving like the hare or the tortoise? If you’re a resident, do you plan to do a “financial fellowship” after residency?