In the following series of posts, we will explore the life circumstances and money psychology issues that often lead to 10-15 years of wasted opportunity to build significant wealth for professionals beginning their working career. These are the inherent difficulties that all professionals face to becoming financially free. I will readily admit that to non-professional readers these will sound very similar to “first world problem” memes on the internet. The majority of other financial blogs and their readers would scoff at anyone making six figure incomes who suggest they may struggle with achieving financial independence. They are not my focus here – you are. The following issues are very real and detrimental to the majority of professionals out there. If you have been affected by any of these pitfalls already, don’t fret. The first step to changing behaviour is recognition of the problem. Many professionals before us have NEVER gained insight into these mistakes and are continuing to run the rat race because of it. There is always time to change and get your money working for you.
The professional has the following challenges in planning their finances which we will go through one by one:
- Delaying Gratification
- Societal Pressures to Exhibit the Professional Lifestyle
- Lifestyle Inflation
- Tendency for Blind Faith in Other Professionals
- Potential for Over-Confidence in their Own Abilities
The first big factor that causes most professionals to start slow in wealth building is the fact they spent a long time in school to finally get to their paying job. This can range from 5 years for engineers, 7-8 years for lawyers and dentists, and 10-15 years for doctors. These time frames also imply you can complete your degree as fast as possible! Thus, many professionals are beginning their working career in their mid to late 20’s and often into their 30’s if they are doctors. You may recall jealously watching your friends or siblings who had already begun their career while you were still stuck in the books. You watched them buy their first cars and homes, eat nice meals and enjoy nice trips, all while you were busy studying and putting in tons of free labour. This becomes a battle in delayed gratification for the professional student and it has a spectrum like anything else.
On one end of the delayed gratification spectrum, there is one common trap for the financially ignorant. This trap is to feel that you will already be “rich” later in life when you begin earning a large income, therefore you should start enjoying yourself while you are still young. You likely can recall a few people that bought a nice new car in med school, bought nice clothes or had a fancy wedding to start showing off their soon to be attained wealthy social status. To facilitate these “eager beavers”, the banks are very keen to offer obscenely large lines of credit to many types of students in professional schools with very little scrutiny. These loans seem very cheap as they are given at optimal borrowing rates like prime. Banks know that there is very little default rate (meaning inability of the student to make payments) on these types of student loans, as they often will be interest only with no fixed timeline to repay while still a student. Even when the student maxes out their credit limit, the bank often lends the student more money to help make their basic interest payments.
This type of “eager beaver” has often created a substantial negative net worth for themselves before starting to earn any income. A negative net worth means that they have more debt than assets (assets means anything with value that can be sold for cash – no, your hockey card or shoe collection do not count here!) Some negative net worth is unavoidable if we need to borrow to pay for our education. Financing your education is often a form of “good debt” because it has paid for a larger potential income stream for many years in the future. “Eager beavers” make the mistake of taking on “bad debt” because they don’t have the basic understanding of personal finance to avoid depreciating assets early in life. A depreciating asset is any object/financial holding that loses value over time. This compares to an appreciating asset that gains value with time. Generally good debt is used to acquire appreciating assets and bad debt to acquire depreciating assets or consumer goods. We will explore this in another post.
The eager beaver’s limited financial knowledge continues to work against them in their early professional years as they acquire more depreciating assets and avoid paying their debt down aggressively. An eager beaver will often have the waterfront house, enjoy fine dining and expensive clothes, lavish trips and $100,000 car all within a few years in practice. They tend to be aggressive spenders and live pay cheque to pay cheque. Their view is there will be plenty of time ahead to save and pay down all the excess debt that has accrued. These professionals look rich from an external view, but are poor on a financially free scale. They will have become slaves to their possessions and will be working for a long time to service the costs of these assets. The eager beaver is firmly caught in the rat race cycle and will struggle to retire at a typical age like their 60’s, let alone retiring early.
Societal Pressures to Exhibit the Professional Lifestyle
The second variation of this trap is much more common and somewhat more excusable given the context of the professional’s life. It lies more in the centre of the delayed gratification spectrum. This type of professional had the fortitude to delay gratification during their student years. They have been debt adverse and only borrowed what was needed to get through their training. The difficulty arises during the first few years of making good six figure incomes which becomes very enticing. Who can really blame them? In a doctor’s case, they have patiently waited for almost 10 years for this moment where they can finally enjoy all the fruits of their hard labour. Haven’t they delayed gratification enough? Finally buying a nice house or a nice car seems only fitting. In fact, society almost DEMANDS it of you. If a professional drives up in a rust bucket of a car or even an entry level compact car, they are immediately considered a cheapskate. As a professional at work, clients may not take you seriously without exhibiting a successful lifestyle. If you continue to live in your apartment from residency a year or two longer, you will start getting odd looks. Parents and friends will start pressuring you to buy a big house. No one wants to hear about how you are becoming debt free in two years rather than ten and supercharging your financial freedom. Society largely judges you on your external demonstration of wealth. If your external wealth snapshot doesn’t line up with society’s view of what it should be, you will likely be deemed cheap, odd, or potentially less successful than you should be. This is a broad generalisation, yet the above societal influence can often contribute to professionals jumping into buying expensive cars, homes and trips quickly after beginning work.
Beyond the societal pressures, a professional often will have the personal feeling that they now deserve to enjoy a better life after all their hard work. This really isn’t much different than any individual entering the workforce, but a professional may feel extra entitlement based on all the sacrifice and effort that led up to their first big pay cheque. This is wholly understandable and I am in no way passing judgement on anyone who felt this – it’s natural. In fact, I don’t pass judgement on the eager beaver either. Current Western society drives materialism fairly aggressively and these individuals likely didn’t have some basic financial advice from parents or a financial planner until it was too late.
Moderate excess spending to keep up with personal and societal visions of success will lead to a noticeable increase in lifestyle within the first few years of work. Typically there is nicer than average cars and houses in more expensive neighborhoods. These professionals spend most of the first 10-15 years of life paying for the house and car, while investing a bit into their RRSP’s. In their mid-40’s, they start saving more after all debts are paid and maximise their RRSP with some extra for TFSA or a non-registered account. Eventually they can retire in their 50’s or early 60’s to a reasonable quality retirement. This works just fine for most professionals and is the conventional path. Overall, there is nothing wrong with this financial path, but you will never quite feel totally in control of your own destiny. You will feel some degree of constant pressure to work hard, experience some degree of burnout stress and occasionally feel like you struggle to make ends meet.
Do you identify with any of these traps? If so, did you find a way out of it? Please discuss in the comment section below as I’m interested to hear about your experience.
Our next post will review some simple shifts in perception to combat these two financial traps and will help move you onto the unconventional path to wealth and early retirement.