When I first learned how to calculate my net worth, one concept struck me: I was in a battle with and against compound interest. Furthermore, the outcome of this battle would be decided by how well I stopped compound interest from working against me, and how well I got it working for me.
So, I began to think of my wealth as a compound interest scorecard. This has been a really helpful framework for me to think about things. When I first calculated it, my net worth was even more negative than minus $500,000. My compound interested scorecard was way tilted toward "working against me."
But at least I now had a good way of thinking about the financial decisions that I needed to make to right the ship.
With that said, I'd like to share my current compound interest scorecard and a helpful framework.
My Original Net Worth Scorecard
Before we get to my current status in the game, let's quickly review where I started off. And I do mean quickly -- because this is really easy to summarize.
When I first checked my net worth in 2020 – my final year of training -- here is how things stood ...
Items of compound interest working for me: Nothing. Zero. Zilch.
Seriously, not even a high yield savings account making 0.0001% annual percentage rate.
Yes, this is what happens when you actively ignore personal finance, never start your education, and stick your head in the sand like I did.
Items of compound interest working against me:
- Credit card debt (around $50,000)
- Private student debt (around $225,000)
- Federal student debt (around $300,000)
Yikes!
Next Steps
At this point, after first grasping the concept of the compound interest scorecard, I actually felt empowered, instead of feeling the fear I initially worried I would feel.
So, my wife, Selenid, and I started to work to increase the number of items in our portfolio that got compound interest working for us (not a terribly difficult feat given the current zero items we had). And we worked aggressively to decrease the number of things in which compound interest was working against us.
But that is not the whole story.
At this point in time, we were transitioning from being a plastic surgery resident (me) and a PhD student (Selenid) to becoming an attending surgeon and a university professor, respectively. This meant our income was about to increase tremendously. Along with it, our ability to acquire new assets and liabilities would increase.
However, the liabilities would be (and certainly were) way more tempting to buy than any assets, because liabilities like fancy cars, massive homes, and expensive toys (boats, etc.) seem a lot more fun -- at first. If we weren't careful, we could accrue way more items in the "working against us" portion of our compound interest scorecard.
So, we used our knowledge of compound interest -- along with the behavioral strategy of intentional spending -- to limit purchases of liabilities to those that brought us a commensurate amount of joy, while balancing them with the purchase of compound interest-accruing assets.
The benefits of this strategy continue today. We still aim to maximize assets and minimize liabilities, within the confines of intentional spending if assuming liability is necessary (which it rarely, if ever, is).
My Current Net Worth Scorecard
This is the most recent iteration of the result of these strategies in the form of our compound interest scorecard.
Items of compound interest working for me:
- 403b account (Jordan)
- 403b account (Selenid)
- 457 account (Jordan)
- Roth IRA (Jordan)
- Spousal Roth IRA (Selenid)
- Taxable investment account (both)
- Three 529 accounts (one for each kid)
- Investment real estate (seven properties, 16 units)
Items of compound interest working against me:
- Private student debt ($39,000)
- Federal student debt (approximately $300,000)
- Home mortgage
A couple of notes here: Notice that I include only the values of the loans in these lists; for more absolute values, you can check out this post. Also, I do not include the mortgages on the investment properties in my "items of compound interest working against me" list. This is because I do not actually pay these mortgages. Each month, our tenants pay for these mortgages with their rent. The extra money (after maintenance, insurance, etc.) goes into our pockets in the form of returns (which compound as we use it to purchase more investment properties). That is the important difference between bad debt and good debt.
This scorecard also fails to illustrate something I am really proud of. When we first moved to Buffalo from New York City in 2020, we both needed cars. I decided to buy a used Toyota. However, Selenid wanted a newer SUV since she would be driving in heavy snow. After a lot of research, we decided to go with a Kia Telluride. However, we did not have enough to buy the car outright. So, we leased it, with a plan to buy it in cash when the lease expired. And that is what we just did! So, you will see no car debt on the "bad" compound interest list!
How Did We Make This Happen?
Well, these major changes didn't happen overnight. We're also not quite where we want to be yet. Our ultimate goal is to have no items in which compound interest works against us. That means paying off our student loans and our mortgage. Both of which we are doing. And don't get on me about interest arbitrage. I get it. But we prioritize being debt free.
But that's not the point here, which is that we really turned things around. But it was not sexy. Or necessarily quick.
In retrospect, 3 years is a relatively short period of time to make a turnaround like this. But, as the saying goes, the years are short but the days are long.
All of this is the result of building up small daily habits that helped us eliminate bad compound interest and start accruing good compound interest.
It started by me paying off a $400 student loan and investing $750 in a Roth IRA when I was still an about-to-graduate trainee (because all we had to spare was $1,150). But these small actions build and build and build. And honestly, a lot of times it feels like not much is actually happening. Then one day, you check your compound interest scorecard and realize that you've actually made a dent.
And that is a great feeling, and one that is within all of our grasps as we strive for financial freedom and the ability to live and practice on our own terms!
Jordan Frey, MD, is a plastic surgeon at Erie County Medical Center in Buffalo, New York, and founder of The Prudent Plastic Surgeon.
Looking to improve your financial well-being? Check out Frey's online course, Graduating to Success, a comprehensive and interactive 12-module course that helps doctors achieve personal, professional, and financial success during and after their transition from trainee to attending.