How Doctors Can Calculate Their Expected Net Worth

One of the biggest financial misconceptions and mistakes among doctors is that many of us believe our high income equals high wealth. But this is not how it works. Income does not equal wealth. If you make $1 million and spend $1 million, your wealth is still zero despite your income. Instead, net worth is a measurement of your wealth. So, how can doctors estimate their expected net worth?

Net worth offers a real numerical value for wealth. It sets the rules of the game of personal finance. Understanding net worth therefore teaches you the rules of the game and lets you start playing…and winning.

In very simple terms, net worth is equal to your assets minus your liabilities. So then, what are assets and liabilities? Many definitions of assets and liabilities exist, including some that are unnecessarily long and complicated. Simply put, assets are anything you own that put money in your pocket. This includes things like stock or bond investments and cash-flowing real estate. Conversely, liabilities are anything that takes money out of your pocket. The most common liabilities are debt and non-cash-flowing real estate like our primary homes.

Net Worth = Assets (put money in your pocket) – Liabilities (take money out of your pocket)

What is interesting to note in this calculation of net worth is that your income does not come into play. You will not find income listed anywhere on any net worth calculator.

So, this equation teaches us how to calculate our current net worth. Thus, we have an accurate measurement of current wealth. You can see how I’ve calculated my net worth here.

But we need context. Without context, we can’t know if our current net worth is where it needs to be given our life circumstances. One way of doing this is comparing our current net worth and nest egg to our goal nest egg. You can learn to estimate your goal nest egg here or download a calculator from my website to help you calculate it.

However, nest egg and net worth are not exactly the same thing. In one way, the nest egg calculator may be more functional as net worth and wealth are also not exactly 100% correlated. However, net worth is still the best measurement we have for wealth, and so it is worthwhile to use.

We can put our current net worth in better context if we have a way of estimating our expected net worth. In this way, we can compare our expected and current net worth to see where we stand. We can see if we are behind or ahead of schedule. Then, based on where we stand, we can adjust our written financial plan to make sure we end up where we want to be — reaching all of our financial goals.

However, you may be wondering whether it is possible to estimate your expected net worth. Thankfully the answer is yes. So, let’s look at a couple methods.

The Millionaire Next Door Method

The Millionaire Next Door by Thomas Stanley, PhD, and William Danko, PhD, was one of the first personal finance books I read when starting my financial education.

In this book, the authors gives the following formula for expected net worth:

Expected Net Worth = ((Age x Pre-Tax Annual Income)/10) – Inherited Wealth

For example, for a 61-year-old with an annual income of $235,000, his/her net worth should be $1,433,500 ($235,000 X 61, divided by 10) using this equation.

But does this make sense for doctors?

The Doctors’ Adjustment to the Expected Net Worth Equation

The criticism of the Millionaire Next Door method of calculating expected net worth for doctors is that we start out more behind the eight ball. Oftentimes due to debt and a later start at making a good salary, doctors tend to have lower net worth at the beginning of their careers.

Therefore, Jim Dahle, MD, at The White Coat Investor (WCI), has suggested an adjusted formula for doctors:

Expected Net Worth = (Annual Salary x Years in Practice X 0.3) – 200,000

Comparing the Two Equations

Let’s use me as an example to examine the difference between these two net worth estimation equations. For reference, I am currently 35 years old, and my annual base clinical salary is $490,000. Therefore, using the Millionaire Next Door equation, my estimated net worth is:

Expected Net Worth = ((Age x Pre-tax Annual Income)/10) – Inherited Wealth

Expected Net Worth = ((35 x $490,000)/10) – $0 = $1,715,000

Now, let’s examine using the doctors’ equation:

Expected Net Worth = (Annual Salary x Years in Practice X 0.3) – 200,000

Expected Net Worth = ($490,000 x 3 X 0.3) – 200,000 = $241,000

Now let’s look at where my net worth actually stands compared to these estimates. My current actual net worth is approximately $410,000. Again, you can get an inside look at this calculation here.

Compared with the Millionaire Next Door equation, that means my net worth is about $1.3 million less than what it should be. Now, compared with the WCI doctors’ formula, my net worth is about $170,000 more than expected.

Both estimates are a big swing in either direction, and could represent huge changes in attitude and mindset on the path to financial freedom. These equations give a difference in expected net worth of over $1 million! This begs the question…

Which expected net worth equation is best? I hope the above example illustrates the answer to this question (hint: it’s the formula adjusted for physicians). Kudos to Dahle for creating his adjusted calculation of expected net worth.

This equation takes into account the average student debt held by doctors. Further, it uses years in practice rather than years in age to reflect doctors’ later start in wealth building. As a result, there is a slow start followed by an expected exponential growth in net worth using this equation. This provides a much more accurate equation for physicians to estimate our net worth.

What Should We Do With This Information?

Net worth is a really powerful tool. It teaches us how to play the game of wealth building and traveling down the path of financial freedom. Once you know the rules, you can play the game.

When I first checked my net worth, it was more than negative $510,000! I expected to feel fear upon making this first calculation. But I surprised myself and actually felt empowered because now I could play the game. And it has paid off. But, we still need context to understand where we are in the game relative to where we should be.

I recommend checking your actual and estimated net worth every 3-4 months. That way you always know where you are (and can adjust as necessary) on your path to financial well-being and freedom.

Disclaimer: The author is not an attorney, accountant, or financial advisor. His expertise is in the field of medicine. Any information in this op-ed and its links should not be considered personalized financial advice.

Jordan Frey, MD, is a plastic surgeon at Erie County Medical Center in Buffalo, New York, and founder of The Prudent Plastic Surgeon.