Many of the physician clients I work with don’t use a budget. They typically have enough income each month to cover their expenses with room to spare, so a budget is not high on their priority list.
This usually works fine for them, especially if they save and invest automatically. However, I would argue that creating a budget and sticking to it can show many physicians where their money is going each month. This, in turn, will allow them to save and invest even more, so they can build more wealth in the future.
If the idea of a budget gives you anxiety or stress, you’re not alone. For many, the word “budget” feels restricting, like they are taking all the fun out of the lives they’ve worked so hard to build.
However, when used in the right way, a budget can actually give you permission to spend free from guilt. You never have to worry that you should have applied the money you spent on dinner towards your student loan debt.
A budget gives you clear-cut rules for where your money goes each month so you can enjoy your life even more.
If you’re interested in creating a budget, here’s how to do so effectively:
Step 1: Track for One Month
Before you even consider making a nice spreadsheet with your budget on it, track your spending for one month. You can do this by reviewing your credit card statement at the end of the month. Or, you can use an app to help you track your expenses (Mint is a popular one).
Step 2: Review
At the end of the month, review all of your purchases. Look for things that stand out.
For example, did you spend more on groceries than you thought you did? Did you notice a bill you always paid automatically, like a cable bill, suddenly increased by $10? Did your daycare accidentally double bill you?
Reviewing your spending is good because it not only gives you a moment to check your own habits, but it also gives you time to make sure everyone else is billing you appropriately too.
Step 3: Adjust
After reviewing your spending, make a note of things you want to adjust.
Most people want to start budgeting so they can become better with money or learn how to manage their saving and spending habits.
So, chances are, you’ll have some things you want to change after you review a month’s worth of spending. You might even take this time to call your cell phone company, cable company, and other subscription services to ask for a reduced rate.
Step 4: Plan
Now that you tracked your spending, reviewed your purchases, and decided what you want to adjust, it’s time to actually plan your budget.
First, list all of your monthly expenses. This should be easy because you just reviewed your spending and know more about where your money goes each month.
Don’t forget about non-regular bills and expenses, like a car insurance payment every 6 months or yearly property taxes. Think about things like holiday spending too. These are all things you can save for each month little by little so they don’t come as such a shock when it’s time to actually pay those bills or make purchases.
Compare your expenses to your monthly income, keeping in mind that you should be allocating your income towards your budget categories after taxes and after you put some away in a savings or investment account.
For most of my clients, the largest categories in their budget include their mortgage, student loan payments, and childcare. For those with older children, private school tends to be a big expense too for many of my clients.
Now that you have a good understanding of your income and your budget categories, there’s only one step left.
Step 5: Stick to It
Admittedly, sticking to a budget is much harder than creating one. Just remember that when you’re new to budgeting, it’s helpful to check your spending once a week or so to make sure you’re on track. Once you become an experienced budgeter, you will get a feel for when you’re close to going over budget without even having to check.
If you think you might have trouble sticking to a budget, get your spouse involved. Working together with your spouse is a surefire way to ensure you stick to the plan. If you’re not married, ask another physician friend or a family member to budget alongside you.
Remember, if you go over in a category, it’s not the end of the world. You simply need to adjust again. This might mean not going to see a movie the last week of the month and instead stay home. The goal is to keep your budget balanced so that if you go over in one category, you take away from another to make up for it.
Ultimately, practice makes perfect, and having a budget will enable you to have a deeper understanding of your finances, which can enable you to build more wealth in the future.
It’s that Simple
As you can see, creating a budget is really simple. Just like anything in life, though, it does take practice. You shouldn’t beat yourself up if you go over budget in your first month. For many people, it takes 3-4 months to really get the hang of it. Even people who have been strict budgeters for a year have months where the unexpected occurs.
What’s important is that each month you start with money you already have. So if you need $7,000 to make your budget run smoothly each month, but you start the month with $10,000, you’re already ahead of the game.
What you don’t want to do is budget with future income. So, if you know you’re getting a nice bonus check in the middle of the month, you would factor that into the following month’s budget, not the current one.
By doing your budget this way, you eliminate the need to constantly check your accounts. You know that your automatic payments can come out without over drafting. You know everything will be paid on time. This is far better than spending your money and counting the days until your next paycheck.
If you look at it this way, a budget is not restricting at all. Rather, it’s a tool that helps you with your money, and the more your practice and stick to it, the better off you’ll be financially.