The Importance of Saving Now

Us doctors understand the importance of saving NOW, and yet I often run into colleagues who tell me they have yet to start saving, let alone start investing or plan for any financial goal more than a year away. Let me illustrate why it is important to start NOW, and then describe why it is even more urgent for us doctors to do so.

Let’s try a thought experiment. Take two twins. Anne and Beth. They’re both 22 years old.

Anne starts out conscientiously saving $2000 per year for 6 years, and then gets married and does not save another cent for the rest of her life. Beth, however, goes to grad school, travels the world, finally settles down after 6 years and starts saving $2000 per year until she retires at age 65. They both invest in a hypothetical mutual fund that returns 12% per year. At 65 years of age, Anne and Beth are sitting down having coffee, reminiscing about the good old days, and Beth remarks that wow, she has been diligent, every year without fail she has been investing $2000 since the age of 28, and now she has $1.2 Million in her account. To which Anne remarked “Isn’t that interesting, that’s how much I have, too!”

Figure 1.1. At 22 years of age, Anne saves $2000 per year for six years and then never saves another cent in her life. Her twin sister Beth, however, goes to college, and otherwise explores life for six years without saving a cent, but then, systematically saves $2000 per year starting at age 28 until she retires at age 65. They both invest in a mutual fund that returns 12 percent/year. At the age of 65, Beth remarks to Anne, “Wow, I’ve been disciplined. I’ve been saving every year without fail for the last 37 years, and now I have $1.2 million in my account,” to which Anne says, “Isn’t that interesting? That’s how much I have too.” Moral: start saving and investing as soon as you can. Don’t delay.

When I first heard of this example, I was a broke intern, but it gave me hope. The lessons I learned from this example are:

1. Small investments, over time, grow a lot

2. Start early. Anne only put in $12,000 over 6 years, far less than Beth put in $74,000, but Anne was early by only 6 years. One doubling time.

3. In this equation, there are only 3 variables: time to start investing, the rate of return, and the amount invested each year. Of the 3 variables, time to start investing is both the easiest to control, and has the most impact.

But we’re doctors. When I was an intern with my first paycheck yet still broke, I was already 27 years old – Beth’s age! I was already behind. I could only compensate by either saving more money, or increasing % return, which even in the raging bull market of the 1990’s was hard to do on a consistent basis without some kind of mechanical system.

Doctors are also hindered by an especially uncertain changing landscape - for a variety of reasons, reimbursement continues to drop, expenses such as regulatory compliance and malpractice continues to rise, we’re directly or indirectly urged to work more, take care of ourselves and our families less, and burn out at a younger age. Medical technology continues to advance, every advance forces us to re-learn and effectively re-train. Bottom line: we start earning later and have fewer effective earning years before voluntarily or involuntarily retiring. Time is against us. We must start saving now.