Consumption smoothing

[phenylacetone]

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I've been experimenting with the idea of consumption smoothing as a amateur economist and future physician-in-training.

For some first principles: I currently live an ascetic bachelor lifestyle, and have for the better part of a decade. I'm an unattached, childless, 23-year-old M3 with no debts or obligations aside from my student loans now approaching the $200k mark. I live happily in a poorly-appointed studio apartment within walking distance of my home hospital (in a moderately expensive major city) and have no current interest in moving on up, as it were. No car. Basic cable. Library card. My total non-tuition outlays average under $1600/mo or $20k/yr.

Given that I'm a fairly strong US allopathic student, the probability that I won't someday become a practicing physician is fairly low (<5%). With that in mind, is it reasonable at some point to elevate my budget in anticipation of my future income? Friedman called this the permanent income model. At some point between 5 and 10 years from now, my net predicted income based on conservative estimates will spike overnight from 150% cost of living to >300% CoL (and potentially as high as 500%). As the marginal utility of those dollars in my early attending years will be much less than the marginal utility of dollars today (even considering the time value of money), it makes sense to smooth my consumption by elevating my budget slowly over time.

Has anyone looked at the optimal time and method to go about this for senior medical students and residents? As mentioned, I'm happy with my current standard of living, but I'm most interested in the theoretical analysis.

 

[The White Coat Investor]

I've been experimenting with the idea of consumption smoothing as a amateur economist and future physician-in-training.

For some first principles: I currently live an ascetic bachelor lifestyle, and have for the better part of a decade. I'm an unattached, childless, 23-year-old M3 with no debts or obligations aside from my student loans now approaching the $200k mark. I live happily in a poorly-appointed studio apartment within walking distance of my home hospital (in a moderately expensive major city) and have no current interest in moving on up, as it were. No car. Basic cable. Library card. My total non-tuition outlays average under $1600/mo or $20k/yr.

Given that I'm a fairly strong US allopathic student, the probability that I won't someday become a practicing physician is fairly low (<5%). With that in mind, is it reasonable at some point to elevate my budget in anticipation of my future income? Friedman called this the permanent income model. At some point between 5 and 10 years from now, my net predicted income based on conservative estimates will spike overnight from 150% cost of living to >300% CoL (and potentially as high as 500%). As the marginal utility of those dollars in my early attending years will be much less than the marginal utility of dollars today (even considering the time value of money), it makes sense to smooth my consumption by elevating my budget slowly over time.

Has anyone looked at the optimal time and method to go about this for senior medical students and residents? As mentioned, I'm happy with my current standard of living, but I'm most interested in the theoretical analysis.

Consumption smoothing is a wonderful theory. However, in practice, it is called living beyond your means.

Keep in mind you are currently living FAR beyond your means. You're running up $70K+ in debt a year in addition to everything you're making. So in effect, you're already consumption smoothing quite a bit.

But the big problem with consumption smoothing is the fact that it doesn't recognize that it is far easier to be young and poor than old and poor. When I was 23, in college (back in the 90s) I was living on less than $500 a month. Yup, you got that right. Rent was $188. I shared a room in a 3 bedroom apartment which the two of us shared with 4 other guys. I didn't have a car. I walked or road my bike everywhere I wanted to go. And I liked. I loved it. Uphill both ways through 2 feet of snow.

Seriously, not that bad. I had no family I felt like I needed to support and all my friends were poor too.

Now, I'm in my 30s and live in a neighborhood where all the houses are 4000-5000 square feet. My social circle consists of doctors, lawyers, business owners etc. I've got several kids that I only get to spend 18 summers with and a wife that wants a little payback for suffering through a decade of medical school, residency, and military service on a shoestring budget. It would be much harder to be poor now. I'd have to look my 7 year in old in the face and tell her she has to wear the same shirt she wore yesterday to school or that she can't play soccer in the local league or that we can't go see Grandma this summer etc.

Don't feel too badly for yourself, either. We're still using the furniture we got in medical school. We still get movies at the library. We still have basic cable. I drive a beater. I hope you don't expect to be instantly rich when you get out of residency. Much of that income you so richly anticipate will be eaten up by taxes (expect about 30%). Add on another big chunk for student loans. You might even be married with children. You're surely not going to want to keep walking everywhere and living in a studio. There won't be as much money as you think there will be. You'd be amazed at how easy it is to go through $10-30K in a month. But the lessons you're learning now will carry you far if you don't build up too much of a sense of entitlement from the delayed gratification.

 

[touchadream]

I've been experimenting with the idea of consumption smoothing as a amateur economist and future physician-in-training.

For some first principles: I currently live an ascetic bachelor lifestyle, and have for the better part of a decade. I'm an unattached, childless, 23-year-old M3 with no debts or obligations aside from my student loans now approaching the $200k mark. I live happily in a poorly-appointed studio apartment within walking distance of my home hospital (in a moderately expensive major city) and have no current interest in moving on up, as it were. No car. Basic cable. Library card. My total non-tuition outlays average under $1600/mo or $20k/yr.

Given that I'm a fairly strong US allopathic student, the probability that I won't someday become a practicing physician is fairly low (<5%). With that in mind, is it reasonable at some point to elevate my budget in anticipation of my future income? Friedman called this the permanent income model. At some point between 5 and 10 years from now, my net predicted income based on conservative estimates will spike overnight from 150% cost of living to >300% CoL (and potentially as high as 500%). As the marginal utility of those dollars in my early attending years will be much less than the marginal utility of dollars today (even considering the time value of money), it makes sense to smooth my consumption by elevating my budget slowly over time.

Has anyone looked at the optimal time and method to go about this for senior medical students and residents? As mentioned, I'm happy with my current standard of living, but I'm most interested in the theoretical analysis.

I love the phrase "amateur economist"! Both words are alarming when applied to your profession and its transitions. So you have chosen a profession which makes you a late earner of high income (hopefully), but also gives you therefore a shortened period of high income, or else a prolonged career (longer time to retirement). Some of this falls into the income or consumption smoothing theory, but it lies strictly in the realm of theory because of a number of flaws in the underlying factual assumptions, some of which ActiveDutyMD pointed out. 1. You are living on loans which are not "income", so all of the money you receive is tax -free at this point from those loans. 2. When you begin to repay, if you defer and pay when you have the private practice or academic appointment, there is no deduction for the interest, so you will have to earn $1, pay back 40 cents of it to the gov't, then use 60 cent dollars to pay for the loan principal and interest, effectively smoothing consumption involuntarily. This factor, also mentioned by ADMD, is more significant, theoretically than it may at first seem, due to the nature of the tax expenditure budget. This concept is simple--the govt can tax all income. What is chooses not to tax is what it chooses to give back to you of what you earned. It has chosen a progressive tax with six rates and you will pay at the highest of these six rates as your marginal rate. This means that every extra dollar you make above a threshold is that 65 cent dollar. Add some for your state tax, also progressive, if you are in an income tax state, and you have a system that is smoothing your income/pressuring consumption. 3. There is tremendous social pressure on the profession, depending on specialty, but its there, to demonstrate success by consumption, so there is more "value" theoretically in not smoothing consumption but in bumping it up during the high earning practice years, from this real economic demand factor, kind of unique to profession 4. The theory misses the economic lifestyle process, attachment, procreation, the ballooning of costs this causes due to the prolonged education of human children 5. As to method: the entire thought process is underpinned by income assumptions/projections/loans/arbitrage? That's why I think to some extent "amateur economist" is redundant!
So experiment on paper for fun, (I'd like to see your projected numbers) not with your life! Doing a medical career right from the financial standpoint means managing tax, seriously a big deal for you, managing risk, also seriously a big deal for you, managing consumption/debt, not spartan, but not stupid, and managing your personal life (avoid divorce, for example). My H is MD and I'm tax attny/fin advisor and I work with doctors so can tell you that the more you have the more you have to lose, and that's not as comfortable a place as it may look. Ralph Waldo Emerson put it this way: Things are in the saddle and ride mankind. ActiveDutyMD is on target that those residency years when everyone is poor together are some of the best, and you are doing well to savor them.

 

[TexasPhysician]

200K as only an MSIII?! You are already living far above your means! MSIV with applications is the most expensive year. You will graduate with higher than average debt already.