The key to building wealth is to convert active income into passive income. As doctors pursuing financial freedom, in essence, your goal is to create passive income.
When physicians think of this in general, it should be as follows:
- Work to earn active income
- Use that active income as seed money to grow passive income
- Once that passive income exceeds expenses, you are finally free
This strategy to create passive income should not be ignored or looked over. It is the key to reaching financial freedom and retiring on your terms at your retirement goal.
Most doctors think they can only create passive income in their non-clinical life, but that isn’t the case! Doctors can create passive income clinically as well. Too many physicians ignore the potential of their practice to generate passive income, and there are many ways to do so.
1) Optimize your practice by investing to reduce expenses or increase reimbursement/income
The best way to reduce expenses is to look at how much you are paying for supplies and seeing if you can get a better deal for the same quality. Too often practices think that there is just one vendor to order supplies from and “the cost is just the cost.” But this isn’t true. By reducing expenses, you increase your revenue by doing absolutely nothing else. Each procedure, each patient, leads to an increase in profit and passive income.
Increasing reimbursement or income is obviously another way to increase your practice’s profitability. And how can you do this and make it passive going forward? The best way to do this is to negotiate with your insurance companies. If you have been in practice for a while and bring patients value, and therefore save your insurance company money, negotiate higher reimbursement. If an insurance company is reimbursing poorly, consider dropping them from your network.
2) Expand your practice to include more doctors or physician extenders while reducing your role
How can your practice make money when you are not there? Easy! Hire more clinicians, whether physicians or not, as employees. And become a passive income earner from your practice.
Even if you don’t want to cut down your hours, you can create passive income by leveraging your practice and other providers’ time. You can only see so many patients or do so many operations. But you can pay an employee to see patients or do operations as well. You collect the full reimbursement and benefits as a business owner and they make their salary. Win-win.
3) Create secondary businesses within your practice such as a med spa, skin care line, physical therapy office, etc.
Your patients are likely very loyal to you and will look to you for medical advice even outside of prescriptions, treatments, and procedures. It is very likely that they would be willing to seek your expertise regarding weight loss, nutrition, supplements, skin care, or other peri-medial therapy. And they would be willing to pay you for these services.
After assessing if there is a demand, build out these services and hire staff to run this aspect of your practice while you still see patients in your traditional medical or surgical capacity. This can be a large source of passive income for you via your practice.
4) Invest in an office building or ambulatory surgery center
Investing in real estate is a wealth accelerator. But usually I am talking about real estate investing in the residential sense (i.e., buying homes to rent out to tenants). But, you could also invest in real estate commercially by renting out to medical practices, or invest more passively in an ambulatory surgical center. These options are available to physicians whether they work in these buildings or not.
The key here is obviously to extensively vet out each opportunity on its own merit. There are good deals and bad deals just like anything in real estate. But a cash flowing commercial property with long-term medical practices as tenants can be an awesome investment. And, just like residential real estate investing, can become quite passive.
Of course, these options are largely available to those in private practice. So, what about employed doctors, like me? How can employed doctors create passive income in their practice?
5) Negotiate your contract to maximize your time on what you value and minimize the time on what you don’t
What I mean by this is that too often employed contracts constrain employed physicians' time on things that are not valued by those physicians.
So, one way to increase passive income through your practice through a back door is to negotiate your time. In this scenario, maybe making a little less money in your contract can free up a whole lot more of your time.
And maybe you can use this time to more aggressively convert your active income to passive income via real estate investing, leveraging your medical expertise, or any of the other side gigs to make doctors passive money. In this case, the money you give up in your contract is covered and then some by passive income that you create through your extra time.
But it’s also OK to negotiate extra time and just do nothing except focus on your self health.
6) Negotiate for administrative or physician extender help
This is very similar to advice above for private practice doctors but with a bit of a twist.
Adding physician extenders to help with clinical work and administrators to help with administrative work gives you much more time to do things that are profitable for your employer. You can see more patients, do more procedures, and operate more when you don’t spend time on the other tasks.
So, you need to show your bosses that hiring someone and paying them will free you up to make them way more money by being clinically active rather than focusing on other less productive tasks that an assistant could easily handle. Now, you are able to do the same per capital clinical work, but make more money. And yes, at first, this extra money is going into your bosses’ pockets.
But when you negotiate, you bring the hard evidence of how much more profit you are bringing and how you want to be compensated for it. And if they don’t agree, move on to somewhere that does want their physicians to bring in more profit for them.
7) Lower your FTE so that you can open a private practice in which you create passive income
This option is a bit more of leap of faith for many employed physicians but can work really well. One of my partners dropped down from 1.0 FTE to 0.8 FTE at his employed job. This freed up one day a week for him to work in a private practice.
You can do this as well and then use all of the strategies already discussed to create passive income via a private practice. If you increase value and create passive income for your employer, negotiate appropriately, and still get nowhere, this would be my next thought.
So, the time is now to start thinking about how you can begin converting your active clinical income to passive clinical income to promote your journey to financial freedom.
Do you have any other tips on converting active income into passive income? Share your thoughts in the comments.
Jordan is a graduating fellow in plastic surgery at NYU.
Illustration by April Brust