High Income, Broke Anyway

High Income/Broke Anyway

After being an employee for an academic medical center for the first several years of practice, I joined an established medical group.  The owner was gracious enough to hire me in as a partner.  He and I practiced medicine similarly, and I had complete faith in his abilities.  Before making the momentous decision to become half owner of this business, I studied the books very carefully.  Although my partner had saddled the practice with a decent amount of debt, and took an accelerated depreciation of assets, the cash flow was good enough to join.  Little did I know that I would spend the next five years whipping him into financial shape.  He often paid himself over $300,000 a year.  Despite this high income, he was broke anyway.

All Hat, No Cattle

My partner had all the trappings of the upper-middleclass neighborhood that he settled in.

But he lived well outside of his means.  He raised his kids in an above average neighborhood in an above average home.  He was mortgaged to the hilt.  His litter of children went to the most expensive private schools.  They summered at the élite summer camps which they attended with the most expensive sporting gear.  He had all the trappings of wealth, but he was broke anyway.

His savings rate was negative 10%.  That’s right, he borrowed ten percent above his income each year through credit cards, home equity lines, and personal loans.  He had a pair of 529’s for his oldest children which he raided when his funds toppled even lower.

He had no investments. No owned real estate.  His net worth was in the gutter.

High income, broke anyway.

When it came to his bank accounts, there was no there there.

How do you think he supported this lifestyle?  To my horror, I quickly learned that his favorite method was to extract cash from the practice as soon as it hit the books.  He often had the accountant cut his own payroll checks early, while delaying his employees biweekly wages.  And when the practice started to crack, he called the local bank and extended the line of credit.

The Winds Of Change

The moment I realized the stagnant economic environment, I took charge  immediately.  I  terminated all early payroll checks, paid off high interest rate credit cards quickly, and built an emergency fund for the practice.  We next attacked the HELOC and brought it down to  a more manageable number.

The economic outlook of the practice was much improved, my partner, however, was struggling.  Extirpated from his ready source of cash, he was stuck facing his own personal financial demons.  Every week I would see him huddled with his  accountant in deep conversation.

Eventually he had to take a loan against his own 401K, cash out his 529 plans, and borrow money from one of our employees.

The Last Straw

The employee, it turns out, was our office manager.  They had known each other for years, and had developed a close relationship.  Imagine my anger, weeks later, when I learned of this loan.

She was making a fifth of what my partner was paying himself.  Yet he had the audacity to borrow a thousand dollars from her because he was short fifty to pay his children’s nanny.

I knew, at that moment, that our partnership’s days were numbered.  Despite his cash flow woes, I was able to protect both myself and the practice from financial disaster.  It was one of my crowning achievements.  I paid myself well, and never allowed him to short the employees again.

Eventually I dissolved the partnership and struck out on my own.

And I never looked back