High Income, Broke Anyway

Broke Anyway

High Income/Broke Anyway

After being an employee for an academic medical center for the first several years of practice, I joined an established medical group.  The owner was gracious enough to hire me in as a partner.  He and I practiced medicine similarly, and I had complete faith in his abilities.  Before making the momentous decision to become half owner of this business, I studied the books very carefully.  Although my partner had saddled the practice with a decent amount of debt, and took an accelerated depreciation of assets, the cash flow was good enough to join.  Little did I know that I would spend the next five years whipping him into financial shape.  He often paid himself over $300,000 a year.  Despite this high income, he was broke anyway.

All Hat, No Cattle

My partner had all the trappings of the upper-middleclass neighborhood that he settled in.

But he lived well outside of his means.  He raised his kids in an above average neighborhood in an above average home.  He was mortgaged to the hilt.  His litter of children went to the most expensive private schools.  They summered at the élite summer camps which they attended with the most expensive sporting gear.  He had all the trappings of wealth, but he was broke anyway.

His savings rate was negative 10%.  That’s right, he borrowed ten percent above his income each year through credit cards, home equity lines, and personal loans.  He had a pair of 529’s for his oldest children which he raided when his funds toppled even lower.

He had no investments. No owned real estate.  His net worth was in the gutter.

High income, broke anyway.

When it came to his bank accounts, there was no there there.

How do you think he supported this lifestyle?  To my horror, I quickly learned that his favorite method was to extract cash from the practice as soon as it hit the books.  He often had the accountant cut his own payroll checks early, while delaying his employees biweekly wages.  And when the practice started to crack, he called the local bank and extended the line of credit.

The Winds Of Change

The moment I realized the stagnant economic environment, I took charge  immediately.  I  terminated all early payroll checks, paid off high interest rate credit cards quickly, and built an emergency fund for the practice.  We next attacked the HELOC and brought it down to  a more manageable number.

The economic outlook of the practice was much improved, my partner, however, was struggling.  Extirpated from his ready source of cash, he was stuck facing his own personal financial demons.  Every week I would see him huddled with his  accountant in deep conversation.

Eventually he had to take a loan against his own 401K, cash out his 529 plans, and borrow money from one of our employees.

Broke Anyway

The Last Straw

The employee, it turns out, was our office manager.  They had known each other for years, and had developed a close relationship.  Imagine my anger, weeks later, when I learned of this loan.

She was making a fifth of what my partner was paying himself.  Yet he had the audacity to borrow a thousand dollars from her because he was short fifty to pay his children’s nanny.

I knew, at that moment, that our partnership’s days were numbered.  Despite his cash flow woes, I was able to protect both myself and the practice from financial disaster.  It was one of my crowning achievements.  I paid myself well, and never allowed him to short the employees again.

Eventually I dissolved the partnership and struck out on my own.

And I never looked back

 

 

 

Doc G

A doctor who discovered the FI community but still struggling with RE.

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22 Responses

  1. Ms ZiYou says:

    Sounds like you were well out of there. It’s scary how many people earn well yet spend it all. And more.

  2. Caroline says:

    And there are so many people like him out there! I just don’t get it! What does it take for people to understand how it works with money?

  3. Steveark says:

    I often said that hundreds of my employees drove better cars than me or my wife back in my plant manager days. And my higher up corporate bosses were no better off even though they made millions per year, they spent that and more. Oh well, I’m early retired and they are still working 60-70 hour weeks. Who is happier? Pretty sure its me!

  4. What a challenge you had having him as a business partner. Too bad you had to see this and deal with it first hand.

    We have some neighbors that I suspect are similar. We started calling them “The Joneses” because every time we drive by, they are adding on, buying a new boat, car, RV or some other toy. I would love to know if their net worth is in the gutter and I suspect they have a negative 10 percent savings rate too. But I’ll bet the huge crowds of “friends” that show up at their big parties are impressed and think these are the rich people. Maybe they are, but I’d be surprised.

  5. Sounds like a great guy (sarc). Lifestyle inflation to the hilt. Like I always say, you have something he’ll never have – enough.

  6. Unfortunately, lifestyle inflation is not hard to fall into. Each year, adding this or that doesn’t feel like much, but cumulatively, it adds up and can lead to dire financial straits. And especially with kids, it’s so easy to overdo it because hey, who doesn’t want what’s best for their children. Private school, summer camps, private tutoring, club sports, etc. All that costs big bucks. It’s a different kind of keeping up with the Joneses but essentially the same. When all your professional peers are spending to get their kids a leg up, it’s very difficult to just say “No, I’m not doing that, my kids are fine hanging out at home playing video games, while your kid is at science camp”. Excellent post as usual.

  7. While it might seem incredible that he behaves this way, I’d suggest he’s the majority and the most of us commenting are the minority.

    Very few people achieve a savings rate of 10%, let alone the 30% – 50%+ that FI bloggers push for.

    I know I suffer from lifestyle creep 100%, but rather than be okay with it, I’m frustrated, angry with myself, and a little ashamed. This will be the first heath will push to have our lifestyle deflate, I’m excited for it.

    I’m glad you got out and were able to run your own practice, well done!

  8. Ty says:

    I read about stories like these from various financial blogs, but have never met anyone like this in real life. I know someone who owns a $40 million house in SF, but he is worth over $10 billion. The people I know who own $5 million homes are worth $30 million or more. I know a few Tesla owners, but they are all worth well over $10 million. My middle-class relatives live in more modest $1.5 – $2 million houses and drive mid-range cars, but have no mortgage and own multiple rental properties or apartment buildings. My friend in Singapore owns 4 Ferraris, but he’s worth over $50 million. My experience has been that if someone has a lot of material trappings or is showy, they are probably pretty darn rich.

    During my recent plane ride back from Cancun, I struck up a conversation with a dad of two girls who were playing with my daughter. The family looked like an average middle-class family but they had some nice things in their carry-ons, and simply left their car at expensive airport parking during their vacation rather than having someone drop them off. I curiously looked up his profile after I got home, turns out he is a serial entrepreneur who has sold four successful startups and is now founder and CEO of a 5th startup with 100 employees, has early investors with big names in Silicon Valley including the ex-CEOs of Cisco Systems, Internet Security Systems, and Arista Networks. Big money is everywhere.

    • Doc G says:

      Wow, I need to hang out with your friends. I see a lot of this kind of behavior (living above one’s means) in the area I live in.

      • Ty says:

        Many of them I knew professionally when I was working. I’ve gone to their houses and attended parties… hanging out with them often would make me feel poor. Perhaps Silicon Valley is just unique, and populated with high earners who are analytical, and good with math and finances.

      • Ty says:

        The dad I talked with told me about his company, and his tech supplier is my former employer. When he asked about my story, he was quite disappointed that I early retired, thought it was rather a waste. He said one of the reasons he loves Silicon Valley is because people are so genuinely helpful towards his business, full of energy, and never retire (his advisers left corporate jobs but are still active in adviser roles), unlike in his home country in Europe. Different reaction than what I’ve read from FIRE bloggers, which is generally surprise or envy, lol.

  9. FU MON CHU says:

    I think alot of people in this situation don’t really know any different. They are just living their lives without having thought about it too much and just assume thats the way things are. The FI community is still quite small and generally misunderstood by the mainstream, even if thay are aware it exists. Even I only discovered it last year

  10. This is sad, and probably not as unusual as I hope it is.

    So what happened with him? Even though you dissolved the partnership, were you able to convince him to make some serious life changes?

    -DoD

    • Doc G says:

      I think me leaving the practice forced him to reevaluate. I still think he lives over his means though.

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