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Webster’s dictionary defines Arbitrage as:

1. The nearly simultaneous purchase and sale of securities or foreign exchange in different markets in order to profit from price discrepancies.
2. The purchase of the stock of a takeover target especially with a view to selling it profitably to the raider.

 

The financial blog community has cleverly adopted this concept and applied it to various factors that an individual can take advantage of to hasten the path to financial independence.

 

It is not the amount that you earn that matters most. It is what you keep. Click To Tweet

 

• Geographic Arbitrage:
  • This type of Arbitrage has the most substantial impact on an individual’s bottom line and income retention.  Remember it is not what you earn, but what you keep that ultimately matters.
  • This is best exemplified with the differences between living in coastal cities (such as San Francisco) versus choosing to earn a living in a Midwest location.
    • Coastal cities have multiple factors that drive up the cost of living, which in turn means more of your income is lost and less is retained to build true wealth.
      • Housing: 
        • San Francisco now boasts a median house price of $1.6 million in the first quarter of 2018.
          • A 20% down payment alone will require $320k
        • Compare this to Forbes #1 place for housing, Dallas, Texas where the average home price is $233k and one can see there is a significant housing arbitrage that can be exploited.
      • State and Local Income Taxes (SALT):
        • California is known to have among the highest imposed taxes on its residents and has a progressive tax scale (higher earners pay a greater percentage)
          • The top marginal income tax rate is 13.3%, the highest in the nation
          • The base sales tax rate is 7.25% and total sales tax can range from 7.35-10.25%
          • Property tax is approximately 0.75% effective rate (although the percentage is relatively low, remember home valuations are much higher than non-coastal homes and thus the overall tax paid can be substantially higher)
        • Compare this to Texas
          • 0% state income tax
          • The base sales tax rate is 6.25% and total sales tax can reach 8.25%.
          • Overall effective property tax is 1.9% (however this is assessed against much lower priced homes than coastal areas and the overall tax paid will be lower)
      • Salary Differences
        • To exacerbate matters, physicians in these high cost of living areas typically earn LESS than their counterparts in low cost areas.
          • Usually this is explained by the greater number of physicians aggregating to these desirable areas increasing supply and thus driving down demand/compensation.

 

 

• Time Arbitrage:
  • Because of the magic of compound interest, a significant difference in portfolio values can occur based solely on the difference in when an individual first invests.
    

    Courtesy of Motley Fool (assuming an average 7% rate of return)

 

• Specialization Arbitrage:
  • Another significant impact in the ability to create wealth is which specialty you choose (as a physician) or what specialization you have done in any field of work
  • Although generalists have a potential 2+ year headstart on specialists due to differences in lengths of residencies, as my “The Specialty Gap” post demonstrated, this time arbitrage was quickly overcome by the sheer magnitude in salary differences.
    • Even with a progressive tax code in place, higher earners still are able to overcome the extra training required in residency due to the substantially higher income.
      

      Medscape Physician Compensation Report 2018

      

      -Medscape Physician Compensation Report 2018

• Employed vs Self Employed:
  • Typically a self employed physician will make more than his or her salaried hospital employed counterpart.

As one can see, there are many paths that lay in front of us, from the choice of what specialty to pursue in med school, to what part of the country one wants to live in, to what type of practice one chooses.

This decision tree can accelerate or retard the path to wealth.

As long as an individual is cognizant of these factors no choice can be truly wrong.

It is all up to the individual on what he or she prioritizes.

Some may find the draw of beaches and warm weather too much or may have strong family ties pulling them there and therefore chose to forgo potential Geographic Arbitrage.

 

 

Others may truly have a passion for teaching and take pride in shaping future generations of physicians, etc. and thus gravitate towards academic positions.

For those individuals, the trade-off is worth it and realize they may have to work longer in their career to achieve financial independence that may have come sooner elsewhere.

Others, like me, may have lucked into a specific situation (which will be detailed in an upcoming post) that gave them the benefits of geographic arbitrage even before they even knew what it was.

 

 

Superpower Take-home Points;

1. It is not how much money you earn, but it is how much you keep that matters.
   • The use of various types of arbitrage can greatly increase your chances of retaining wealth
2. Ultimately it is an individual choice on what factors have the highest priority and whether it is indeed worth the trade-off

 

 

 

 

 

 

 

 

 

 

Note:

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