MEconomics, Part 4: Getting a Life--and Paying For It

We've reached Part Four of this series of posts on my personal financial profile as a working doctor. Part Three presented my income scenarios for the first three years post-residency. I have been lucky enough to increase my income by about 58% since I first arrived in Rural, mostly by working a lot and taking on more hospitalist shifts. This week, I'll show you where that money is going by revealing my personal spending habits.

First, you need to know a few things about me to understand the spending decisions I've made:

• I've been burdened by consumer debt in the past, so I am very careful about making large purchases. I always have a plan in place to pay off any big expenses.
• I don't spend more than I earn. My credit card gets paid off at the end of the month.
• I am not a fancy pants. I will wear clothing until it falls apart. Patients often tell me, "You don't look like a doctor," and they're right.
• The biggest goal I've had since being an adult was to own a home. I moved a lot as a kid and I've never had the sense of home that a lot of people have. Specifically, when I moved to Rural, I wanted a home with a bit of land around it, off the main road and not too close to neighbors.
• I am very concerned about the environment and have made a number of decisions that did not make perfect financial sense for me but reduced my carbon footprint.
• I am a creative person at heart, and my creativity has a lot of outlets, such as textile arts, creative writing, reading, visual journaling, and gardening. Hobbies can be costly but I have made a commitment to having these pursuits in my life because they add depth to my everyday life and--I believe--make me a more balanced and perceptive medical professional.

I'm telling you this because I don't think we can judge people unfavorably for spending money. Not in America, anyway. I make no claim to live a frugal, rock-bottom life. I spend money where I think it is important, and one of the reasons I am able to spend money is because I work to earn what I spend. This does not make me an irresponsible person, but an ordinary one.

Without further ado, here's a breakdown on my monthly expenses (exclusive of federal and state income taxes). I present my first-year scenario and my current scenario, so you can see how much it costs me to implement my goals of homeownership, alternative energy, and creative self-discovery:

Total annual expenses, Year One: $67,200

Total annual expenses, Current: $142,320

As you can see, there was an almost 2-fold increase in my expenses since my arrival in Rural. No, I didn't buy a Gulfstream, but I did make a few middle-class advancements:

1. I Bought a House

At first I rented a house, but after about a year in Rural, I found a newly-built ranch-style house on 2.3 flat acres. The house was off the main road and the nearest neighbors were a herd of cattle belonging to a nearby family farm. It was the house I wanted, and after checking out another dozen houses, just to be sure, I became the happy owner of the first house I looked at.

Now, you should understand that even little Rural was affected by the real estate boom of the early 2000s. In 1999, the median home price was $122,000; in 2005, it was $340,000. You might wonder why prices almost tripled in a town six hours drive away from San Francisco and ten hours away from Los Angeles. Answer: a hot market for an ocean view. Apparently the last bit of affordable coastal property in the state was here in Rural, and foreign and out-of-state investors bought up most of what was left of it. This drove prices up inland, with the result that, instead of spending $250,000 on my house, I paid $565,000. This was 6% less than the asking price, mind you.

No regrets! I got a 30-year fixed mortgage at 5.875%, my partner put down 20% (from the sale of our old house), and I joined the cheerful ranks of American homeowners. This brought with it not only a $2675 monthly mortgage, but also property taxes of $500, homeowner's insurance of $50, and an estimated $150 of maintenance per month as well. I factor in a maintenance budget every month to cover summertime field mowing and as a cushion for unexpected roof leaks and plugged drains. Every homeowner should.

2. I Made Improvements on My House

When we first moved in, I had a small backyard area fenced in and had a shed built. Costly, but these were paid off in short order. The big stuff was coming up.

I'd always wanted to invest in a home powered by alternative energy. If I'd been involved in the building of this house, I would have installed solar hot-water radiant floors, but the house was already finished when I bought it. However, there was still a roof to improve. One of the reasons I wanted this house was because the long axis faces south, and there are no overhanging trees obscuring exposure to the sun. The perfect roof for solar power.

First, I maximized energy efficiency in my home. I replaced incandescent light bulbs with compact fluorescents. I gave away an old, electric-powered clothes dryer and bought a gas-powered dryer and a high-efficiency, front-loading washer.

My second move was installing a solar hot-water collection system in 2006. Cost: $9,700 after a $300 state energy rebate. I got an additional $2,000 federal tax credit that year. The move reduced my winter gas bill by 50%.

Finally, I geared myself up for the Big One: installing a full solar electric system. I had enough data to size the system at 2.88kW to meet 95% of our average usage. Cost: $29,200 after a $4,800 state rebate. I got another $2,000 federal credit on my 2007 tax return. I'm still paying for the Big One ($12,000 to go), but now my electrical meters run backwards.

It is important to emphasize that installing solar hot water and electrical systems were not purely financially-motivated decisions. It will take about 10 years for the hot water system to pay for itself, and 20 years for the electrical system, assuming current energy rates stay stable. The upfront cost of converting a house to alternative energy poses a huge upfront cost and a long amortization period, so taking the plunge was more about philosophy than money. No regrets.

Here's my roof:

3. I Decided to Eat Local Food

I spend more on food than an average family of six, I'm sure. I don't gorge myself on caviar and sushi every night, but I do spend a lot of money on locally-grown produce and local, pasture-raised beef and chicken. If you've read The Omnivore's Dilemma, you're aware of the huge amount of petroleum invested in industrial food production and distribution. Part of shrinking my carbon footprint therefore involves investing in locally produced food.

This is an expense lots of people couldn't afford. There are a lot of people in the U.S. who don't have access to night-quality nutrition of any pedigree. I'm sure we've all taken care of diabetics who relied on food banks and the high-carb contents of the weekly food box. So I'm not touting this expense as a smart financial choice or even the right philosophical position for a troubled earth. Often, I struggle with the idea of spending this kind of money on food for me, my partner and my pets, when there are lots of hungry people in the world. Ultimately, I'm a think globally, act locally kind of person, and I support the hard work of small organic farmers with my own hard-earned dollars.

(Of course, the food budget includes the occasional indulgence in Haagen Daz, and supports DSO's taste for good wine.)

4. I Needed More Insurance

At one time in my life, I carried only a renter's insurance policy and got my health insurance through my employer. Then life took over and now I find myself with homeowner's, disability, auto, life and umbrella policies. On those days when I feel particularly ironic, I consider the multiplication of insurance policies in my name as a measure of professional success.

Most of this insurance coverage is self-explanatory, but two types deserve further inspection:

• Disability insurance: When I was in college I never thought I'd have to insure my earning potential, but a disability policy was one of the first things I applied for after residency. Illness and injury can interrupt anyone's working life, and these interruptions can easily lead to bankruptcy. Disability insurance guarantees a portion of your pre-illness income in the event you are unable to earn it. The cost of such a policy depends on the amount of time out of work before you begin to receive policy payments, your age, and whether or not you choose to pay for inflation protection. Doctors should look for a policy that is guaranteed renewable, non-cancellable, and provides coverage for own-occupation loss. This last condition ensures that you will receive insurance benefits as long as you are unable to resume working within your original occupation: medicine. Without this condition, you could be expected to resume working as a dishwasher if you regain the requisite abilities to do so.
• Umbrella insurance: One of the downfalls of building up your version of the American Dream is that someone can come along, slip and fall on your dream driveway, and sue you for everything you've got. For higher-earning people, an umbrella policy is recommended to extend your home and automobile policies to cover your full net worth, even if this exceeds the limits of the individual policies. I dragged my feet for a long time before buying an umbrella, but I'm glad I did. One nephrologist I know rigged up an obstacle course in her backyard for his kid's friends to play in. One of the friends was injured on the course, and his parents made a large claim which exceeded the limits of her homeowner's policy. Lawyers were involved, and it ended up being pretty expensive. Forewarned is forearmed.

Sorry to be so grim, but once you've slugged your way through medical training to get what you want, you'd better insure it.

5. I Realized I'd Better Start Saving

We all know nobody lives forever. Yet there are many people who fail to recognize that nobody works forever, either. I've met too many people who say "I'm going to work until I drop," and use this as an excuse not to save for retirement. Well, of all professionals, doctors should be the first to realize that most people don't just drop. They dwindle. Human mortality more like a light dimmer than a light switch: there's a long slide into darkness. During the later part of that slide, most people aren't able to make a living due to illness, or the illness of a spouse. In an era of disappearing pensions and general economic uncertainty, personal savings is the only defense against aging into poverty.

I plan to cover my actual retirement projections in Part Five of this series. The $1,725/month in retirement savings represented in the current budget is derived from those projections. We'll discuss whether this rate of savings will be sufficient to meet my needs in retirement next week.

As you see in my current budget, I keep a number of smaller sub-accounts within my online bank accounts at ING Direct and Emigrant Direct. These sub-accounts are as important to the goal of saving for retirement as the money I deposit into my retirement accounts. By keeping separate accounts for an emergency fund, medical expenses, and a "mad money" account for vacations, gifts, and other indulgences, I can avoid any dereliction of retirement savings that might result from having to cover expenses in these categories. (Read more about how to set up an emergency fund here at Bankrate.com).

Am I saving enough? Probably not. Am I saving as much as I can? Certainly not. Every year I resolve to save a greater percentage of my total income, and I have increased the percentage by a few points each year, but I haven't attained the threshold of savings I'd like to have yet. I consider my spending habits to be a work in progress. Maybe I'll be more motivated to save after exposing my budget to the medical blogosphere in this post.

In Conclusion

In presenting this analysis of my spending patterns and how they have evolved since I entered professional life in Rural, I hope I have contributed something to the public understanding of how a doctor's earning potential measures up to her personal goals. I hope I have shown that, although I do not live a life of strict frugality, I do not indulge in one of reckless luxury either. If the cost of living my particular brand of rural life has doubled my monthly expenses, the additional money has gone, not toward leasing a couple of BMWs, as one poster to this SDN thread about Part Two of this series suggested, but towards homeownership, investment in alternative energy and local food, and responsible insurance and savings practices.

Occasionally I wonder if I might have been better off keeping life simple and continued renting rather than upgrading to ownership, with all its expensive spinoffs. Then I remember my old dream of Home, and the satisfaction of believing, when Govenor Schwartzenegger talks about the Million Solar Roofs Initiative, that he's really talking about my roof, and I realize that my life is truly more than the sum of my paychecks.

Comments

[Theresa]

Fortunately, the clinic where I do my prenatal care is covered by Federal Tort Reform, so tail coverage is not at issue there. The hospital provides malpractice including tail for our hospitalist group. If I had to factor in the cost of a tail, I'd have to give up some of my chosen indulgences.

[Joe]

Where does tail-end malpractice insurance come into play as a cost? If mentioned elsewhere, I'll have to read again. Thanks for the articles!

[rlbates]

Very nice post, Rural Doc. Very nice indeed.

[Theresa]

Good question. I knew someone would ask. The reason why this does not appear on the budget worksheet is that I tend to donate quarterly to one of four or five organizations, and in varying amounts depending on what kind of quarter I have had myself. For this reason, charitable giving doesn't appear on the budget worksheet, but it should. Thanks.

[CJ]

This isn't any of my business, of course, but since you've laid it all out there I thought I'd ask -- what about charitable giving?