My Wealth Journey Part 3: Awakening & Recalibration

In the first part of this series, I unpacked financial lessons from my early career and how my wife and I built a strong financial foundation. Next came The Wonder Years of my first decade in practice. An exciting time, when we finally started building our business, investing for our future, and spending some money feeding the delayed gratification beast. We felt like we were finally reaping the rewards.

My perspective on that changed after a few kicks that caused me to wake up from my reverie. We had overshot in some areas requiring re-examination and recalibration. In particular, what I was giving up to earn and spend more. Everyone will have their own story, and hopefully awakening. Then, recalibration using that financial awareness. In the next installments, I will share some of the lessons I learned from mine, hoping that it helps some of you stop hitting the snooze button.

My Financial Awakening

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My Career Was Going Well

Up to that point, I didn’t pay much attention to my pay beyond looking for efficiencies. I was working really long hours, but I felt like I was making progress and that the work I was doing was important. As I showed graphically in my previous post, I spent about five years putting extra work towards improving how our practice functioned. That gradually improved outcomes for our patients and yielded a better quality of work-life for our staff. Around 2011, it also started to pay off financially. Despite the hours and stresses associated with it, I was quite happy with my career.

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My career didn’t exist in a vacuum.

Outside of my clinical practice, there were some minor annoyances. On the financial side, there was a provincial tax increase. There was little fanfare, and I didn’t realize it until I was kicked awake a few years later. The first kick came from unilateral fee clawbacks. In itself, that wasn’t going to change what I did. However, the blatant disregard for fair processes, the misleading information about physician “salaries”, and the inflammatory rhetoric from the politicians bothered me. The cheerleading by some of the public that I was working so hard to serve upset me. Still, I rolled over and went back to sleep.

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Waking up.

I remember exactly when I bolted upright and started looking around. It was May, 2015. I had made it home for an evening during a heavy few weeks of on-call. My wife and I were sitting on the couch watching the news. I was exhausted. I then watched Justin Trudeau “asking that I do a little bit more” via a tax increase. The tone and delivery were like fingers on a chalkboard to me, but objectively it was an increase to a 53.53% top marginal rate. I felt like I was working hard, and contributing already. “Asking” me to do more and telling me I should be grateful to do it because of my good fortune rubbed me the wrong way.

I reflected on why it bothered me so much, besides being tired from working hard for my good fortune. The source of my visceral response became clear when I did the math. That increase would be added onto the Ontario fee clawbacks and a tithe paid to fund our University Department (to enable teaching and research not paid for by the government). Put together, I would only keep 34% of my income for working the second half of the year. Plus, pay HST whenever I actually bought anything. And I was being told that I wasn’t doing my fair share. What would “fair” look like? That caused my wife and I to ask ourselves why we were doing this.

This caused us to re-examine and take action on some important aspects of our financial lives. Our return on work effort. Our return on spending. Taxes impact both, but we hadn’t paid that much attention to that either. We figured taxes were just part of paying for the society we enjoy. Since we were going to be painted as not doing our fair share, we wanted to be doubly sure that we weren’t paying more than we had to.

Return for Effort

It is easy to point to how much money someone makes. However, that does not capture the effort and sacrifices that went into making it. We even do that to ourselves. It is easy to ignore your income when you are enjoying your career, have no problem paying the bills, and feel like you are doing valuable work that is recognized and rewarded. However, it only takes a problem in one of those domains to make you stop and reconsider the return for your efforts. At the risk of using “admin-speak”, that problem can be an “opportunity” to examine the exchange you are making of time/effort for money.

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Know the after-tax value of your time

The first step is to figure out how much spending power you get for working. You can only spend after-tax money. So, take your after-tax income and divide it by the number of hours worked. I made the TiMER tool to help.

Knowing that can help you in a couple of ways. You may discover that some jobs around the house that you don’t mind doing pay you more than you make working. Even as a physician. Managing your portfolio is an easy example. Done simply and effectively, it pays more per hour than brain surgery. Or even reading pulmonary function tests.

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Diminishing Return For Working More

You will also quickly figure out that your most valuable hours worked are early in the year. Working additional hours has a diminishing return on your time due to bumping up tax brackets. This was the math that I did when I was jolted awake. In addition to taxes and tithes, there may be other expenses that come with working extra. Some are fixed, like office rent. However, others scale or are added with increased workloads. For example, child care, travel, administrative support, or lost income due to a spouse cutting back their work to support yours. Different careers and family circumstances will have different challenges and options.

Understanding this is helpful if you have some degree of control over how much or what type of work you do. I was fortunate in that regard. I have gradually stopped stepping up to be the first person to fill in service gaps. Even though it was desirable work, I now feel better doing less of it. Getting paid more per hour is a bonus. Instead of extra work, I could spend more time kicking work-life imbalance’s ass. I also gave up parts of my practice that came with high fixed overhead. Even though it paid well on the top line, the net income loss was attenuated by also dumping the associated costs. That was more than made up for by increased flexibility in my work hours.

Our Spending Problem

Even if you are fortunate enough to have a career with the flexibility to change how much and how you work, you cannot make adjustments if you spend everything you make. We spent very little during the first part of our financial journey, but we also had little income. When I started making drastically more as an attending physician, we still spent moderately more for a few years. Those early years of “living like a resident” despite my attending income compounded our increased financial freedom later. However, our spending eventually really took off.

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The Earning & Spending Trap

When I had my financial awakening in 2015, we found ourselves in the earning & spending trap. We had gradually adapted and dialed up the speed on the hedonic treadmill. I was earning more and could afford it. However, it was hard to cut back or make adjustments without addressing our spending. Our discretionary consumption was increasingly driving our need to earn money.

There were two major jumps in our spending. One was structural and more difficult to control. The other was discretionary and easier to adjust. Spending is an important skill to develop, and spending synergistically to improve happiness helps. There are also strategies to help you enjoy the process and avoid a lip-skid on the hedonic treadmill. Fortunately, we didn’t have any stumbles on the treadmill, but we were starting to sweat.

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Structural Spending

A major factor was building a large home. Ok. A truly massive house with acreage. That created a large ongoing structural cost. Increased taxes, maintenance, and utilities. Tractors make maintenance easier (and more fun), but they also require maintenance. And, of course, a barn to put them in. There was also a baked-in high cost to sell the property. While we did not make money when we did eventually sell it, it did provide value for us.

It facilitated our ability to live surrounded by nature, and exercise regularly. There was plenty of space for our hobbies, and I could bike to work via a rail trail. Even though our property was “a thing”, it facilitated many of the activities and experiences that we valued. Arguably, that could have still been done with less than 10000 sqft and the unintended consequences that came with that.

Like many people, we justified sparing no expense with the premise that it would be our “forever home”. We were overbuilding for the future. However, this was ultimately a lesson in affective forecasting. People are bad at predicting how a purchase will make them feel in the long run. That makes careful and honest reflection even more important before making major increases to structural spending. Real estate is a classic example.

One reason why we are poor at affective forecasting is that we change and our situations change over time. Often, in completely unexpected ways. So, this requires ongoing reflection and recalibration. Preferably before a “cash-flow event” forces it. That can even happen to doctors: health issues, family issues, pandemics. Your lifestyle is more precarious when structural spending dominates your budget.

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Variable Spending

The second spending bump occurred after I started paying attention in 2015/16. What happened? Don’t people try to spend less when they pay attention to their budget!?!

In reflecting on what we valued, we adjusted our spending. Initially, that was up. We bought a motorhome and started traveling as a family frequently instead of taking occasional all-inclusive resort vacations. It didn’t save money, but we enjoyed more active trips. The time and money required to learn new skills and develop hobbies were also prioritized. We became more involved with some charities, giving both time and money.

Overall, we did not consistently reduce our spending. However, we could ramp it up or down depending on how much we wanted to work and how our portfolio was doing. That is in contrast to structural consumption costs driving our need to work more or take on excessive risk with our investments.

Recalibrating Our Spending

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Trading Our Country Estate For Freedom

Following the election in the fall of 2015, we canceled further renovations to our property. Our landscaper was furious – we had been doing our part to stimulate the economy. However, there was no point in adding more structural costs.

After a few years of finding ways to align our variable spending with our values, we sold the big property. We were also entering a different stage as our kids started high school. We moved to a smaller house in a different city. Its geographic location was more conducive to an outdoor active lifestyle beyond the confines of our property lines. Plus, it was easier for our kids to independently get around without using major roadways. That geographic arbitrage lowered our structural costs dramatically, increased our financial freedom, and enhanced the parts of our lifestyle that mattered most to us.

We value our freedom to work on our terms and the ability to spend more time and money on living The Good Life over having more house than we need. We learned that through trial and error.

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Major Spending Recalibration

Our lifestyle spending decreased dramatically when we downsized houses in 2020. However, it did eventually increase again. This time the increase was from flexible expenses more aligned with our values and rather than structural costs from excessive stuff. Our structural costs are now similar to the Canadian average, but our spending on travel, skill development, physical activity, and giving is massively more.

Don’t Get Mad. Just Wake Up.

While it was negative feelings that caused me to wake up and take a harder look at our earning and spending, it resulted in our family making positive changes. The reason why I shared the personal negative aspects that were the impetus for my financial awakening is that I have been hearing a lot of those feelings coming up again. The recent capital gains tax increase was not surprising from a fiscal policy standpoint. However, the tone and delivery were almost exactly the same as in 2015. The political rhetoric, misinformation, and hyperbole from all political parties are unlikely to change. Try not to waste your emotional energy getting caught up in it.

Instead, use it as a wake-up call to examine what you are exchanging your time and efforts for. You can change that. The right balance of financial and non-financial costs and rewards will be different for everyone. However, reflecting on that can help you find a time/effort exchange rate that suits you. There are diminishing financial returns for working more. Particularly at higher income levels.

Controlling your spending gives you the flexibility to make more changes. This is particularly important with purchases that come with ongoing structural costs. Reflect on how you spend vs what you value. Recalibrate your goals to match that to get the most satisfying return on your spending. It took us years to work that out and is still a work in progress. As we change and our situation changes, it will continue to change. However, we are now awake and recalibrating deliberately. We now have more flexible spending and lower structural costs enabling us to be nimble.

The other way to get the best exchange rate for your time and effort is to tax plan. Prior to my awakening, I largely ignored tax planning. Pretending to “ask me” to “do a little more” ultimately resulted in me “doing a lot less” on multiple fronts. Working less and spending less is two of them. However, paying attention to tax planning also resulted in my paying less tax despite the tax increases. More on that in the next installment of my wealth journey.