Why High-Income Professionals Struggle to Save

In personal finance, one’s savings rate is an all-important number that has huge ramifications on the journey to financial independence. I prefer to use the after-tax savings rate, since taxes are a fact of life. Simply, this is the percentage of after-tax income that’s available for saving, investing, and building wealth.

While there are a lot of moving parts, assuming that you’re starting at a net worth of zero and you make some assumptions on withdrawal rate and investment return, your savings rate is the single determinant of how many years it will take you to reach financial independence (FI). That’s it! There are many such calculators you can play with. Let’s assume a 4% withdrawal rate and a 5% real investment return. At a 10% savings rate, typical for many Americans, it will take 51.4 years to achieve FI. At 25%, it will take 31.9 years, nearly 2 decades faster! If you can manage 50%, it will take only 16.6 years to reach FI. As of writing, we are running at about 64% after-tax savings rate, which means achieving financial independence would take 10.9 years starting from zero.

Your savings rate is so important because it pulls on two levers simultaneously. First, the higher the savings rate, the more money you have to invest into building capital, which is the economic engine that can create passive income for you. Second, the higher the savings rate, the lower your expenses, which means less of a nest egg is needed to fund your lifestyle.

Despite this very simple math, many high-income professionals struggle to save. With our high incomes, you would think saving money should be easy. And yet, there are some sobering statistics showing the opposite. In a 2020 AMA report, 20% of physicians aged 60 and older reported having less than $1 million in retirement savings. A 2021 Medscape survey found that 49% of physicians feel they live beyond their means.

Through personal experience and observing my peers, here are my top reasons why high-income professionals struggle to save.

Delayed gratification

Becoming a high-income professional typically takes years of additional education and training before achieving the high incomes. In medicine, this includes medical school, residency, and perhaps specialty fellowship training like cardiology or surgery. For me, this was a 10-year long process, including first having to pay medical tuition for the first half, followed by very low wages in medical training. Medicine is an extreme, but other professions like law, engineering, and dentistry require similar rites of passage too.

Meanwhile, many of our friends may have entered the workforce right away after college. So at the conclusion of our training, we are very behind financially, and we have delayed gratification for so long. Our friends may have already purchased houses and cars. Therefore, as soon as we start making that big paycheck, it’s easy to feel that we have already delayed gratification long enough and that we deserve to get that fancy house and car right away. A friend from residency actually financed a new Range Rover a month before we graduated, and bought a big doctor house shortly after starting as an attending. They couldn’t even wait for a month!

Lifestyle inflation

When we get a shiny new toy, it is initially very exciting and a big dopamine hit. But it is human nature to adapt to it pretty quickly, and then crave that next hit. And of course this requires nicer and more expensive things, thus this is what we call the hedonic treadmill.

For me, I love tech gadgets. There’s nothing like unboxing a new iPad or computer or phone. I remember when I first got a Tesla, I was amazed by it every time I drove for a few months. The way it seamlessly connects to my phone, the one-pedal driving, the self-driving capabilities, the way it makes it so easy to listen to podcasts, now I mostly take it for granted.

When I started as an attending, we rented our house for a few years, and while it was a nice house by most standards, the house we now own has so many things we didn’t have before. A three-car garage to put all our tools and bikes. A huge laundry room upstairs. A home theater with a huge screen and fancy sound system. A big yard with a new playset for the kids that doesn’t have rusty screws sticking out.

After a while, you don’t really think about how amazing all of these things are day to day. And so over time, it’s natural to continuously want bigger and better things, which of course cost more money. Yes a Tesla is nice, but they’re everywhere, what about a Porsche Taycan? Or how about a house with an even bigger yard and a pool?

An important skill to combat lifestyle inflation and to improve overall life fulfillment in general is the ability to appreciate everything that you already have. Try to remember what it was like before. Whenever I fire up a movie in our home theater, I try to take a second and feel how amazing it is to have this in the comfort of our own home. Or having a driveway with a basketball hoop so I can shoot around at home instead of going to the park.

Social comparison

This is really hard to avoid. Social media can be a big part of this, as it is engineered to be addictive, and all it does is show you the highlight reel of what people you know are doing.

I deleted my Instagram a few years ago, which probably helps. Now the social comparisons are in real life. We live in one of the most expensive suburbs in the country. Our kids used to go to private school when they were young, but now they’re in public school in an affluent district.

We’re exposed to a lot of wealth around us. It’s the other parents’ cars in the parking lot at drop-off and pick-up. It’s the other kids’ birthday parties at their mansions. It’s the expensive extra-curricular activities. And summer camp! Who knew summer camp for a 6 year-old for a few weeks could cost 5 figures. When your kid plays on a sports team and the other parents decide to get a private box to take the kids to a game, it can be very hard to say no.

Now that we’re a few years into being an attending and are multimillionaires, we’re able to do all of these things and still achieve our financial goals, but this was very hard when we were fresh out of training. Other people know you’re a doctor and so they assume you’re wealthy, but in reality many physicians come out of training with negative net worths. And we were relatively young compared to our peers when we had our first child during residency, so our oldest child’s friends’ parents were often 5 to 10 years older than us and had all those additional years to accumulate wealth.

Lack of financial education

Finally, despite years of higher education, doctors receive very little financial education. I know that was the case for me. The little financial education we got was often from financial advisors and salespeople who were trying to get business by giving talks to medical students and residents. That might be worse than no education at all.

Without education, it’s impossible to know the consequences of our spending decisions. Raising your savings rate by 5% (from 10% to 15%) could mean achieving financial independence almost 9 years earlier. For an average doctor making $350,000, saving an additional 5% post-tax is about $12,000, or $1,000 per month. It could also mean earning an extra $2,000 per month before tax. That’s 1 to 2 extra on-call shifts. That’s 4 to 5 hours of consulting as a side hustle. That could be one extra surgery you’re doing. Making a more frugal decision on housing could easily save $1,000 per month. Getting your groceries from Stop & Shop instead of Whole Foods, packing your lunch instead of ordering, working out at LA Fitness instead of Equinox, and cutting cable already gets you nearly there.

Sure, those are all sacrifices in a way, but it is still a lifestyle that 95% of the population on earth would envy. Is that worth 9 years of your life? About the same length as your entire medical training? Of course it is! The problem is most high-income professionals have not been taught to frame their spending decisions this way.

With our high incomes, I think there’s very little sympathy when we see statistics about how even after many years of working, many high-income professionals are not able to build significant wealth. I think delayed gratification, lifestyle inflation, social comparison, and a lack of financial literacy are among the main reasons why.