Go become a doctor. It will be worth it. Your education is the best investment that you can make. Don’t worry about the loans. You’ll be able to pay them off in no time. I heard all of these things on my journey to becoming an attending physician. I took them at face value at the beginning. And even today, I don’t disagree with them. But I’ve never actually taken a closer look at the return on my medical education and decision to become a doctor. I’ve never actually asked myself: Was my decision to become a doctor and plastic surgeon a smart financial one?
Recently, I read a post from a guest author on The White Coat Investor about the value of his dentistry education. It got me thinking about my own experience, and so I decided to analyze the return on my education using two calculations: Net Present Value (NPV) and Internal Rate of Return (IRR).
NPV and IRR
The NPV equation estimates the present value of past and future cash flows. Basically, you figure out what your future cash flows are and then subtract your initial investment from them, like so:
NPV = (today’s value of expected future cash flows) – (today’s value of invested cash).
This equation is generally used by businesses to determine if a current investment or project is worthwhile. If the NPV is negative, then it’s not. If it is positive to a satisfactory degree, then it is.
The IRR equation estimates the expected annualized rate of return that you will receive from an investment. IRR is very commonly used in real estate investments as a prediction of investment returns. It’s a more complex equation but basically averages expected returns over the number of years of the investment.
Defining a “Good Return”
Now, before I did the actual calculation, I needed to decide what made a “good return.” For an NPV, it’s a little tricky — as that equation is best at just showing if a positive future cash flow exists or not. In that sense, anything positive is demonstrating a good return.
For the sake of narrowing in a little more, let’s assume that you want a retirement nest egg of $3.75 million because your estimated annual expenses in retirement are $150,000. Assuming you have no current savings and a conservative 5% annual return on investments, you would need to save $56,500 annually over your 30-year career to achieve this nest egg. That’s a total savings amount of $1.7 million. However, you also want some money to spend. So let’s say you average $10,000 of monthly expenses, so $120,000 annually and $3.6 million over 30 years. Put these two together and let’s say we want to get an NPV of $5.7 million as our goal.
Now, the IRR equation is a little easier because it is just a percentage that comes out. It’s the expected annual rate of return on your money. For instance, when my wife and I look for cash flowing rental properties to buy, our goal cash-on-cash return is 10% or greater. I think this same value is a good goal for any investment and can be roughly translated into a goal IRR of 10% or greater.
To see the calculation I used to determine my NPV and IRR, click here.
Note: I made some assumptions when making these calculations:
- My undergraduate and medical school costs were about $50,000 each year. I paid for it all in loans. No financial assistance from family, etc.
- My residency and fellowship salaries are estimated based on what remnants of documents I could find. You may notice they seem high for a resident. But this is because CMS inflates trainee salaries in uber expensive cities like New York, where I trained.
- My attending salary for my first three years in practice is accurate.
- My attending salary thereafter is based on my recent renegotiations. I am making the assumption here that it will never go up again.
- In the NPV equation on Excel, you need to place an interest rate on your debt/growth. I used 7% for this rate.
So, based on this spreadsheet, the NPV of my medical education is $4.9 million. Meanwhile, the IRR on my medical education is 22%.
Looking at the numbers, it seems that I underperformed somewhat, especially given my annual income in one of the most highly compensated medical specialties. This really shows the impact of the debt that I took on for undergraduate and medical school studies.
Still, these numbers generally jive with those in the aforementioned article from the White Coat Investor. In the article, a dentist had an NPV of $1.2 million and IRR of 18%, while an orthopaedic surgeon had an NPV of $5 million and IRR of 31%, and a pediatrician had an IRR of 22% (same as me!) and an NPV of only $2 million.
The takeaway is that by both accounts, the return on my medical education and decision to become a doctor was worth it from a financial sense.
And of course, this whole discussion ignores the intangible reasons that make a career as a physician “worth it.” Helping others and providing care to those in need is extremely rewarding. However, we have seen in the burnout epidemic that this is not enough. It takes personal well-being, including financial well-being, to be the best doctor you can be and for these intangible rewards to ring their most true.
NPV and IRR Are Just One Piece of the Puzzle
None of these calculations take place inside of a vacuum. You could have an NPV of $10 million and an IRR of 50%. But if you don’t follow sound, healthy, and simple financial principles like these, you will fail to save, invest, and create a path to financial freedom.
And on the flip side, you could have an NPV of $1 million and an IRR of 10% and, through building basic financial habits, find financial well-being and achieve the ability to work and practice medicine on your own terms.
So, none of this guarantees anything. It is up to you. In the end, all that these numbers show is that it is possible. And for doctors, your NPV and IRR will always be high enough to allow you the chance to reach financial freedom except in the most extreme of circumstances.
Do you feel your medical education has been worth it? Share in the comments!
Jordan Frey, MD is a plastic surgeon in Buffalo, NY at Erie County Medical Center and the University of Buffalo. His clinical focus is on breast reconstruction and complex microsurgery. He is also the founder of The Prudent Plastic Surgeon, one of the fastest growing finance blogs. There, he shares his journey to financial well-being with a goal of helping all physicians reach financial freedom, practicing on their own terms.
Illustration by Getty Images