How to Decide Whether It’s Better if you: Spend vs. Invest

I get questions all the time about how much income to doctors should spend vs. invest. 

If this is your first time checking out my blog, I’ll let you in on a secret, the dreaded “B” word is part and parcel of our budgeting philosophy.

retirement in healthcare podcast episode

It’s all about creating a spending plan, that not only works for you, but it also sets you free. That might be hard to imagine if you don’t currently have a good plan in place, or you have a ton of debt weighing you down. 

However, a budget and spending plan is a way to organize your finances. A budget is you telling your money where to go. 

Perhaps, the most important concept as you build a financial foundation is how much to spend vs. invest!

Let’s dive into some budgeting and finance questions to see if you are on track in regard to the questions surrounding whether to spend vs. invest!

What is the 50/25/25 budgeting plan?

How about that cash flow?

How much income should you spend versus save? Spend vs. invest?

Are you following the rule of 50/25/25? What does that even mean?

It means that 50% of your net take-home pay is going towards your fixed expenses (mortgage payments, car payments, insurance, phone, and cable).

You have 25% going toward variable expenses (car fuel, electric, groceries or water). 

Subscribe to the Financial Residency PodcastThere should be a category for play money in your variable expenses.

All work and no play…have you heard the rest of the saying?

“All work and no play makes Jack a dull boy.”

It’s not just Jack, it’s everybody! We all need fun.

It’s imperative to build a certain amount into your budget, so you can let your hair down. It will actually help keep your budget on track!

Then you’ll have another 25% going into savings. 

It’s true that physicians get a late start on setting up their financial planning and savings, getting your long-term savings in place as quickly as possible is extremely important!

Depending on your circumstances, you might not need to go up to 25% toward savings–although most physicians do!

When your salary goes up as you transition from residency into attending, it’s a good time to give yourself a raise. I usually suggest a 50% raise, which after being on a resident’s salary is quite a boost, without using all of your new income. 

The rest can be used smartly, such as paying down your student loan debt.

How much should you put into your checking, investments, and emergency fund?

This is a hugely popular question, and yet I feel like there is something missing. We are going to add an additional category here…the all-important (and freeing) debt pay down.

In order to sustain financial health, you’ll need to balance the amount of cash you have with paying down debt, and long-term investments.

If you pay off your student loans and consumer debt (think: high interest), just think how much money you can save on all that high interest. In the long-run, your fixed expenses will be much lower. 

I’d say that it is a win-win situation!

What should you keep in your checking account? 

This varies depending on your individual expenses.

Physician Wealth ServicesWhat we like to see is one and a half times your monthly expenses in your checking account. It’s a built-in buffer, while you are creating a spending plan. 

How does a built-in buffer help you?

Things pop-up that you didn’t include in your budget, the extra money is your cushion against surprises. You don’t have to use last month’s paycheck for this month’s expenses (unexpected or otherwise)!

This will help you get out of a defeating cycle: your paycheck comes into the checking account–but it’s already spent.

Emergency Savings

How do your emergency savings stack up?

The rule of thumb is three to six months worth of your expenses. 

Let’s look at a scenario: 

  • You have a steady job.
  • You have no plans to move in the foreseeable future.
  • You have no plans or any large expenses anytime soon.

In this case, I would be careful about keeping too much cash on hand. 


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There are reasons that you might not want to fully fund your emergency savings (compared to other savings you might be doing). 

It could be that you have high-interest debt, after paying that off you’ll increase your long-term saving rate up to 20% to 25%.

Those percentages should be going into traditional investments. 

How do you allocate tax advantage investments versus 529 (or versus other tax-advantaged investments)?

The answer is it all depends.

It depends on what options are available to you.

Does your employer offer a 401k or 403b? Is there a company match? If so, contribute to that account!

We have to be careful about including 529, as long-term savings, because it’s really a temporary savings account meant for future educational costs. It’s not increasing your net worth or providing you with financial independence.

However, it is a potentially tax-advantaged account. Many states offer tax benefits, but you need to check with the state you’re interested in contributing to. 

Do you have access to a health savings account?

Whether you need to use a health savings account will depend on the medical cost of your family.

  • Do you have a healthy family? 
  • Are your annual out of pocket amounts low?
  • Do you primarily use your insurance for wellness visits?

Using a triple tax-advantaged health savings account (where you contribute your dollars on a tax-deferred basis), will lower your taxable income. 

The money can be invested (just like your 401k or 403b), which allows you to grow the money on a tax-deferred basis. The caveat is that you withdraw the money for your health care expenses (tax-free).

Before you consider it, let’s look at a scenario:

You are maxing out your retirement accounts, and your HSA. You are also taking advantage of the backdoor Roth account strategy. 

Now that was a lot of work!

Wait…we aren’t finished yet.

You weren’t earning a lot of income, and not saving any money. Then suddenly you are swimming in the alphabet soup, which means asked to put your money into various retirement plans.

Let’s think about the savings rate. We want to see people have non-taxed advantaged, which is another bucket of money you’ll need to have in order to reach financial independence.

It’s really going to provide you with another bucket of money that’s not tax-deferred. That means when you pull $1, out of your 401k, you’ll need to pay tax. 

Unlike the other after-tax account that will help you build a pool of assets, where you can withdraw without any penalties without any tax-owed, and start to build another tax-advantaged account for yourself. 

What is your allocation? How often should you rebalance it? 

That all depends on your individual circumstances!

It will take another blog with additional context regarding how to go about investing your money.

It’s important to put your money to work, and not just into a money market or conservative fund.

Manage Your Finances Like a Business - spend vs. investA risk tolerance questionnaire can help you understand your comfort level surrounding risk-taking! You can find them on Vanguard and other similar companies.

Here is something to keep in mind: How much you’re actually putting into the market on a monthly and annual basis is a lot more important than the amount that you’re actually going to end up earning. 

The lesson?

Don’t let the fear of not knowing how (or what) to invest get in your way.

How to follow through on investing anyway?

  • Take a risk tolerance questionnaire
  • Rebalance Quarterly
  • Use low-cost ETFs

I’ll add that hopefully your 401k or 40b plan has a feature that is set-up for allocations happens automatically. 

Once you’ve mastered that you’ll be ready for the next step!

Non-Traditional Investments

Are you ready to branch out with non-traditional investments?

The words that describe this investment stage are complex and advanced.

Have you heard of limited partnerships, real estate, or private equity?

This is a stage when you need to understand what you are doing. It takes time to be ready for these advanced investments. 

Let’s look at some important steps in order to get started:

  • Do your due diligence
  • Understand your liquidity needs (how easy can you get your investments out)
  • Are there any capital requirements (Is your initial investment the only one? Are there future investments? Will additional monies be needed?)

A lot of these things are not very liquid. You can’t just decide to sell out of a real estate investment if you’ve bought into a multi-family or other real estate investment trust. 

Are you ready to add complexity to your investments (and life)? 

If so, these may just be the right challenge for you!

Thank you for checking out yet another great blog and episode! I’d like to venture out and say you’re here because you love the podcast. But have you joined the Physician Finance Facebook Community yet? No? Let’s get you over there.