Do you know why you should manage your personal finances like a business? If you’re listening to this podcast, you are more than likely very in tune with your finances. Or, perhaps, you may just be beginning to understand how important they are. Whatever your journey, people like Eric Rosenberg, Host of the Personal Profitability Podcast, make the process oh-so-much easier to understand. Your confidence level in running your personal finances like a business will skyrocket before you know it! And the “why you should” will make sense more than ever.
Think of personal finances as the flow to the ebb of your current or preferred lifestyle. You know what you have and you should know what you owe. Your knowledge of the health of your bank account, expenses, income, income potential, debt, and your investments should be at the top of your mind. They very well are for someone running a successful business.
Manage Personal Finances Like a Business
Eric Rosenberg is immensely helpful for understanding why we should be more optimistic about our financial situation than we give ourselves credit for. He shares his talents online as a blogger/writer who encourages people to spend money responsibly. He thrives in helping people build long-term wealth and have fun in the process.
Eric referenced this popular blog on his Personal Profitability Podcast website called The Complete Guide to Personal Financial Statements
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Personal finance apps referenced in this episode:
Without a good grasp on how to get on solid financial footing, you’ll find yourself up to your neck with stress, worry, and a high-tide of complicated finances. Remember, it is up to you to determine how important your finances are and, if you pursue the right steps, you have the potential of increasing your personal profitability ten-fold.
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Where do you begin? Push the play button.
What you will learn:
- Student debt is like buying a business.
- Don’t give in to the gratification of spending money right now on things that don’t offer long-term value.
- It might feel like a pinch while paying off your student loan debt right now.
- If you’re a doctor, you’re probably going to come out ahead financially.
- The biggest tools on Wall Street are the balance sheet, the income statement, and the cashflow statement.
- You have to show up to work every day and do a good job for your income to rise.
- Software like Personal Capital is the best out on the market right now.
- Assets are things like cash in your bank account, stocks and bonds, and home equity.
- Determining the value of your assets could mean seeing what they could sell for on the market.
- Ryan has a really good looking family.
- Art can turn out to be non-depreciable assets.
- Look at your balance sheet on a quarterly basis.
- Why clarity Money app is a good investment app.
- Public companies are required to release their financial statements.
- Using QuickBooks can help generate a Profit and Loss statement.
- Doctors moonlight by taking additional shifts for extra income; some use the money to throw at their student debt.
- An income statement might have some work-related expenses on it.
- The difference between income and expenses is that one of them lowers your net worth on your balance sheet.
- Take the right steps with your finances by making smart choices on what you spend your money on.
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Full Transcript: This is Why You Should Manage Personal Finances Like a Business
Ryan
Eric, thank you so much for being here. I really appreciate it. It’s always fun to chat with you and this time we’re going to get into something us money nerds really love talking about. So, thank you again for being here.
Eric
Yeah, absolutely. Thanks for having me. I’m excited to be here.
Student loan debt is like buying a business.
Ryan
Awesome man. So, as you know, the show is basically geared for young physicians looking to, basically, better themselves from a financial standpoint. And I always tell clients, when we talk about student debt, look you really bought a business. Right? If you look at it and said okay we paid two hundred thousand dollars. We have two hundred thousand dollars in student debt and I’m going to make three hundred thousand dollars a year; I’m just using rough numbers. You essentially paid less than one times, you know, for the earnings or the potential to earn that money; and I know we’re not excluding taxes and things, but I try to look at it and say, you know, don’t look at debt as such a daunting number that you “made a mistake.”
Ryan
Look at it as a business. And I know that you and I have had some conversations back and forth about treating our own finances like a business. And so, today, we’re going to, kind of, talk all about our own personal financial situations and how we basically view our own personal finances like a business. So, starting there, you know, what are some of the things that our listeners could do to look at their finances more like a business than what they’re currently doing.
Eric
That’s a great question. And, actually, this one hits really close to home for me, because my little sister, I think of her as my baby sister even though she’s grown up now, she’s five years younger than me, but she is a surgery resident at a hospital in Virginia. So, I actually help her with her own personal finance questions on a semi-regular basis. So, this isn’t just coming out of left field for me. This is something that impacts my own family. That makes it very close to my heart. So, doctors out there, I’m with you. I know it’s not an easy path to get to where you are right now, but very bright things ahead. Think about that three hundred thousand number Ryan just said. I know all of us wish we were making, if we were all making that level right now, you wouldn’t be worried about your student loans. Right?
Don’t give in to the gratification of spending money right now on things that don’t offer long-term value.
Ryan
Exactly.
Eric
Yeah. So, like you said, it’s important to remember that you’re, you know, don’t think about your student loans just as an expense. You know, that expense was already behind you, you owe the money, it’s not going away. But that expense wasn’t just like spending money. You know, it wasn’t just like buying a car or a pair of shoes or a new electronic, you know, whatever you’re into. Because those things all become less over time and, you know, it’s just like that instant gratification thing. Right?
Eric
Whereas an education, that becomes worth more over time. So, think about it more like an investment than an expense. You know, I didn’t go to med school, I went to business school, twice actually, and my MBA program had an estimated cost of ninety thousand dollars. And when I went into it, I knew I wasn’t coming out on the other end with, you know, not to knock them, but, you know, people who go get an English degree or a Masters in Social Work; on the other end of their education, their income prospects are, let’s say, thirty, forty, fifty thousand a year, depending on where you live. So, there you might end up with these huge student loans and no really good prospects to pay them off, looking at the short-term or the long-term.
It might feel like a pinch while paying off your student loan debt right now, but there are brighter days ahead.
Eric
It’s very tough in that situation. On the doctor’s side, you have a much brighter future ahead, I would say, and a lot quicker in terms of your personal finances. Because, yes, well, you might be making fifty, sixty thousand a year right now, which, well, it might feel like a pinch while paying your big student loan balances off today, but that actually does put you, often, in the upper half of income earners already in the United States. So, you’re already ahead a lot and you have that huge payday coming down the road when you finish your residency and, you know, become a neurosurgeon or an orthopedist or whatever you’re going to do on the other side.
Eric
So, no matter how heavy any of this stuff feels, try to stay optimistic, because you do have really bright things ahead financially, as long as you stick to that career path. You know, work hard, do well; otherwise, you know, like any other job, you won’t get that good payoff in the end. But, you know, so, that’s the high level. I just like to establish that. From a mindset, it’s really important to think about it like that. You know, don’t, you know, if you’re constantly negative and let it stress you out and weigh you down, it will start to weigh you down. So, you know, think about it from, you know, you’ve got to frame it right.
Ryan
Absolutely, absolutely. And that’s a good perspective to kind of carry through to the next part of the conversation. But, you know, when I, when I look at it, and maybe I said something that isn’t as realistic to everyone. You know, you might be sitting there saying, well, you know, Ryan, I have five hundred thousand dollars’ worth of debt and I’m only going to make two hundred and fifty thousand dollars a year, like, I’m not in the, I can’t necessarily relate to oh , I’m going to make more than my entire student loans my first year out. And, that’s okay, because you still basically paid two times revenue for your business and you invested in yourself. Right? So, it’s like investing in a business and Eric, I mean, you can talk about this, but evaluations on business, I mean, it depends on the industry and everything, but, you know, paying something two to four times forward earnings is still relatively cheap, you know, when you’re looking at it from a high-level approach.
If you’re a doctor, you’re probably going to come out ahead financially.
Ryan
So, you know, even though, you know, we said oh, maybe it’s one to one or even less than that, even if it’s two to one, you’re still sitting in an okay position.
Eric
Oh, yeah. Yeah, anyone, really any doctor, you’re probably going to come out ahead financially. You’re going to do okay, even if the numbers aren’t as rosy as the ones that we painted at the beginning.
Ryan
Yeah.
Eric
I really think, you know, if you look at it, there are companies like SoFi, which they’re a big student loan refinancing lender and they also do mortgages and some other stuff now. And companies like that are actually, like, winding up trying to do student loan refinances for people like doctors, just because of what you said, because that future earnings potential is so good, they know that ultimately a bet on a doctor in terms of a loan or something like that will pay off. So, you know, if a company would rush to hand you money, which I bet you, as a doctor, you would find it a lot easier than most to get a mortgage and other things like that. You know, you’re going to be in good shape as long as you don’t make horrible decisions along the way, which is, that’s what the next tools I’ll talk about are designed to help you do, is avoid making those bad decisions, so you can really leverage that income you have for your earning opportunity to build the life that you want, and ultimately the retirement that you want, way down the road.
The biggest tools on Wall Street are the balance sheet, the income statement, and the cashflow statement.
Eric
So, the tools that I love to do that are really the three biggest tools used on Wall Street to look at a business or judge a business. And those are the ones that I call the personal financial statements. I actually have a blog post about it. Maybe, Ryan, you can drop the link to that in the show notes, so I don’t have to read it out here.
Ryan
Absolutely. Absolutely, I’ll link to it in the show notes at financialresidency.com.
Eric
Awesome. Yeah. So, the three biggest financial statements that an accountant would use, this actually takes me back to accounting, it wasn’t called Accounting 101, it might as well have been Introductory to Business School Accounting. The three big financial statements you learn about are the balance sheet, the income statement and the cashflow statement. And for today’s discussion, I think focusing on the balance sheet and income statement and how they’re going to be the two most valuable. So, what a balance sheet does for a business is, think about it kind of like a net worth statement. So, what that means is, it’s a big list of all of your assets on one side, and then all of your liabilities on the other side. And, ideally, what you have, your assets, is more than your liabilities; and by measuring how that bottom line number, your net worth, changes over time, that equates to what, on Wall Street, we would call shareholder’s equity.
Eric
But, which means, you know, how much, if they decided to liquidate and sell everything today and pay off all their loans, how much would be left over. But there’s no shareholders in you, obviously, you’re a person, not a business. So, you are the shareholder. So, you think about that as equity in yourself and your own finances. So, you know, and it’s very common early on in your financial career, you know, especially right out of school, if you have a couple hundred thousand dollars in med school loans and maybe even some loans from undergrad before that, there is a very good chance you will have a negative net worth right now. And, you know, in business, that’s usually a very bad thing. That’s why, like, Tesla has been in the news a lot lately, not that residents have a lot of time to watch the news.
You have to show up to work everyday and do a good job for your income to rise.
Eric
But, if you do, Tesla has made some bad headlines lately, because ultimately, they’re not performing and selling as well as everyone expected and they have tons of debt. Like ten billion dollars of debt, which is a lot more than they have in assets they could easily just pay off. So, there’s some worries about Tesla’s, you know, viability going forward. But, unlike Tesla, that’s struggling to produce cars, you just have to show up to work every day and do a good job and that income will start to rise. So, when you look at your balance sheet, remember, that’s just a snapshot in time, which I recommend updating it, I like to do it once a month for myself. I update my net worth every month and I have for about ten years. That’s probably a little bit of overkill for most people, especially if you’re a busy doctor.
Eric
But, maybe every quarter or every six months, it’d be a great idea to put one of those together; and it’s actually a lot easier to do, you know, don’t be afraid when I use the word spreadsheet or Wall Street, there’s actually apps that will do it all for you, for free. They make it really easy. One that I use myself, is Personal Capital, to do that. Others you can use are, like, mint.com. There’s one called YNAB, You Need A Budget; that’s really more focused on budgeting than asset tracking, but that is a feature. Or, there’s another one that I like called networthshare.com. And all that website does is net worth tracking and it does it in kind of a fun community way, so you can see how you compare to other medical professionals or other people in your age-range.
Eric
There’s a few different ways you can slice and dice the data to see how you can compare. So, that’s what I like and I’ve been using that one over a year now and before that I used a predecessor it was modeled after. So, Net Worth Share is probably the easiest way to put that together without any big overhead commitments.
Software like Personal Capital is the best out on the market right now to help manage your personal finances like a business.
Ryan
Yeah. That’s fascinating. I’ll have to go check it out because that’s something that I didn’t know. And, you know, I used to use mint.com way back when, even, probably when it first started, just because I liked it; and then I’ve kind of graduated up and since I’ve been running my own financial planning business, I have some, you know, really heavy-duty software that clients and I use. But, from a, you know, from the standpoint of not working with an advisor, I think Personal Capital is probably the best software out there right now. But, just be aware that you will get a call from them, trying to pitch you to invest with them; and you do not need to do that and it’s really frustrating that they do end up doing that. So, the software is amazing and it’s a really good marketing pitch. And then, I’m sure, that a certain percentage that they end up getting in there will end up selecting to open up accounts and kind of run with them as like a robo-type platform, but I would not, you do not need to do that. Just tell them when they call the first time, like, hey, I’m not interested. I just want to use the software. Please don’t call me again. I think I had to say it twice, but then I never got called again, so.
Eric
They’ll respect it. They’re a good company. They’re good people I’ve gotten to know, thanks to Thin Con. They actually have a big office in Denver, where I grew up, which was kind of fun. I’ve known some people who work there. And, yeah, so it’s exactly what you said is right. The software is totally free to use. I’ve been using it, I think, since it came out, since it was brand new. I’ve also used Mint since 2007 when that was brand new. Yeah, Personal Capital is definitely the best for understanding where your investments lie and where they are today. You know, to the investment service they provide, it’s pretty good, there are cheaper ones out there. So, do you want professionally managed money tools where you’re not working with a financial advisor like Ryan, if you want to try to do it yourself, there’s cheaper ways to do it than Personal Capital. So, keep that in mind when they call you up.
Apart from working with a financial planner, there are professionally managed money tools available to use.
Eric
They really like people who have more than a hundred thousand dollars in investible assets. So, if the total of all of your stocks, bonds and cash are more than a hundred thousand when you sign up and link your accounts, expect that call really quickly, because they’ll be excited to know you’re there.
Ryan
Yeah, they’ll be pretty stoked to see someone coming in, especially when they flag you as a physician. Just like the rest of the world, they see dollar signs, nothing personal on them. Right? But, they’re going to see that you marked down you’re a physician and all of a sudden, it’s dollar signs in their eyes and, you know, they’re going to be calling you guys.
Eric
That should make you feel good as a doctor.
Assets are things like cash in your bank account, stocks and bonds, and home equity.
Ryan
It should, but also, at the same time, you know how this works. Right? They end up getting targeted by anyone and everyone. You know, you get in an accident, oh, you’re a doctor? Oh, my back hurts. Right? Or you walk into a car lot and you want to buy a car, they find out you’re a doctor, all of a sudden, they’re not as willing to negotiate, because they know ultimately, you probably could afford it. So, you know, just be careful out there. But, still, I don’t want to detract from, it is actually a really good piece of software. I’ll link to it in the show notes so you guys can check it out. Eric, as you were kind of going along, and I didn’t want to interrupt you, because you had a really good flow going, but we, you mentioned some things when you were talking about the balance sheet, that I do want to just address. So, you mentioned assets and liabilities.
Ryan
So, assets for those listening, are things like cash in your bank account; stocks and bonds, those could be in a taxable account or they could be in a tax advantage account, think like your 401k or IRA; it would be your home and what your home is actually worth. On the liability side, you’ll be putting in what you actually owe from a mortgage standpoint, so we actually get the right equity number and hopefully you have positive equity. If you would have bought in 2007 and you looked at this in 2010, you probably didn’t have positive equity in your house, but now you should, the market’s rebounded quite nicely. You know, you could look at personal property, you know, which could be furniture or art or your sofa and things. I tend to not put that in there, or if I was, I would look at it as what could I sell this on Craigslist for in the next week and probably realize we paid a lot of money for a sofa that, you know, is probably worth a hundred dollars.
Determining the value of your assets could mean seeing what they could sell for on the market.
Eric
I’d only count something that you own. If it’s something that you would and could realistically sell. So, you know, I don’t put furniture and stuff like that. I do include our cars, because that has a very clear value of what we could sell it for; and maybe a couple of art pieces around the house I could argue to put on, because I know there’s a market for it. I could get, you know, five hundred dollars or a thousand dollars, whatever the market value is for those, but your old TV’s and couches and things, if you don’t want them, no one else probably wants them.
Ryan
Yeah. Especially technology. Right? I mean, it’s improving like every minute. So, and if you can find anyone to buy the arts at my house for five hundred or a thousand, I’d be stoked on it, because it’s just pictures of me and my wife and the kids.
Eric
You have a very good-looking family.
Ryan
I mean, they carry me. It’s okay. You don’t have to tell me.
Art can turn out to be non-depreciable assets.
Eric
In my office here, I have two Michael Goddard paintings; and he’s a Vegas artist. He comes out of your town. Those are worth five hundred dollars each. There’s a, but it’s funny, they have not depreciated in value at all. They’re pretty much worth exactly what I paid for them, but hey, that’s still an asset. Right?
Ryan
Technically, yes. And if you enjoy it, I mean, there’s things, and we can kind of go into it a little bit, into a tangent here, but, you know, if it makes you happy and you have all the other stuff that you’ve kind of set aside, you’ve put money in your retirement accounts, you’ve saved for some of the other goals that you have and you have money left over and that kind of stuff really excites you and it makes you happy, and when you’re in your office working and you like it, absolutely make the purchase. And, technically, it is an investment, maybe not the best, but it also has some emotional ties to it. So, you know, I love it. But yeah, I mean, when you’re looking at it from a financial standpoint of we’re updating our net worth and our balance sheets, you need to be realistic and I always tend to be more conservative in things like that.
Ryan
But, you know, we talked about the cars. You can go to kelleybluebook.com and easily run what your car is worth. I would do that, probably every three to six months, is when I would update my own. I don’t update it monthly, even though I’m kind of a money nerd.
Eric
See, that’s even more than me. I do it once a year.
Look at your balance sheet on a quarterly basis.
Ryan
I do it every three to six months. I look at everything in like a quarterly basis, so everything is three to six months. So, and then, you know, there might be other assets that stick on that kind of, side of the balance sheet; and then, on the liability side, you guys are obviously going to be well aware of student debt. You’re going to be well aware of home mortgages. But there could be, you know, obviously, credit card debt. You could have a car loan. You could’ve taken out a personal loan to cover, maybe some of the credit card debt you had coming out, just to get it at a lower interest rate. There’s all sorts of things that can sit on that side of the balance sheet. You need to be really aware that you’re capturing everything to get the most accurate picture. So, if you’re going to sit down and do this, you can almost literally write a T, and on the left side of the T, you know, you’re writing your assets; and on the left side, you’re writing your liabilities. If you didn’t want to link up accounts and do everything at a place like mint.com or Personal Capital.
Eric
That’s another perk of Net Worth Shares. Your accounts there are not linked. So, there’s no real security risk. How I fill that out every month, actually, I open it on the first of every month, and on one screen, because I have two screens on my computer, because that’s what I do all day is sit on the computer; on one screen, I’ll have my net worth form to do the input and on the other screen, I’ll open up Mint or something like that. Personal Capital, where I can get those numbers from. Another one that I really like, that I hadn’t mentioned, which has less of that focus on investments, so it’s not quite as in-depth there as Personal Capital, but for a light budgeting and just quick checking on my money, lately I’ve really been enjoying Clarity Money; and that’s a newer app, but they were just announced to have been bought by Goldman Sachs. So, I don’t know if it’ll be around forever. That makes me a little nervous that my favorite app will go away, but for right now, it’s still out and it’s a good one to use. I like that one too.
Why is Clarity Money app a good investment app?
Ryan
Okay. That’s good advice and I’ll definitely check that one out before I toss in the show notes as well. So, you know, I’ll make sure that it’s still there and it’s still a good app. So, we’ve talked about the balance sheet and really about what it is and kind of why we create one; and what we haven’t really touched on, Eric, is once we’ve done this, you know, I almost want to call it due diligence. Right? Because it’s going to take people some time to set this up. It’s not like it’s a ten-minute exercise. Once we start updating and you have it all built, it’s a ten-minute exercise, but in the initial, it’s really not. Yeah, so once we have it created, what do they do with the information?
Eric
Great. Yes. I’m glad you asked. So, as I mentioned briefly, your balance sheet is a snapshot in time. So, what it looks like today might be very different than what it looks like tomorrow. And, just to compare yourself to some, like, actual, big, public companies, just a fun thing, every public company has to release their financial statements. It’s the law. If you want to be listed on the New York Stock Exchange or Nasdaq, the big stock markets, you have to, you know, release all that information. So, you can go to pretty much any bit company’s website, you can just Google it, and find their balance sheet. So, that’ll give you an idea of what a business’s balance sheet looks like, just so you know to compare, which is also kind of fun. And, you know, let’s say there’s a company that you really like, that you’re, you like either because you’re a customer or you think it’s a neat company, like Google or Amazon or whatever you’re into, Wal-Mart. I’m just shouting out companies now. WWE, if you’re a wrestling fan.
Public companies are required to release their financial statements.
Ryan
So, we went from Google, Amazon and then to Wal-Mart. I love it.
Eric
Totally. Well, hey, Wal-Mart and Amazon, they have a lot more in common than these days than they don’t, in a lot of ways, it’s interesting. But, you know, how you look at any of these companies, is what’s fun. You can look at their balance sheet from a year or two years ago and compare it to their balance sheet today and see if they’ve gotten to a better position or if they’re in a worse position. And, ideally, you know, you’ll want to see that bottom line number, that net worth number keep going up and up and up. And one of the biggest influences on whether that number is going to go up and down, is what I call the personal income statement. And that is, you know, just like there’s a balance sheet for companies, there’s an income statement for companies. Small business will often call it a P and L, or profit and loss.
Eric
It’s like my business, I run it as an S Corp in California, which means I’m working as a corporation registered with the state, not as an individual under my own name. Which in your future as doctors, if you go into your own practice, you’ll definitely do something like that. You’ll definitely want to, for legal reasons and financial reasons. But, you know, we’re not going to get into legal stuff in here. Talk to your lawyer about that, not me.
Ryan
Good little, quick disclaimer there.
B-U-D-G-E-T is a six-letter word.
Eric
Yeah. It’s all, it’s important stuff. You know, the same with taxes. Talk to, anything with taxes and legal things, if you ever have a doubt, it’s better to talk to someone who really knows what they’re talking about. Don’t just guess, because you could guess wrong and it could cost you a lot of money. But, coming back to that income statement, yes, I make a P&L for my business every month. I use a, actually a program called QuickBooks. It’s an accounting program that does it for me, but then I also look at my personal income statement, which aligns up to the “B” word in personal finance, a five-letter word a lot of people are afraid of. I think it’s five letters, isn’t it?
Ryan
No.
Eric
Six-letter word.
Ryan
It’s all good.
Eric
Can you believe that I used to do math for a living?
Ryan
He’s a math guy. He’s not a letters guy apparently.
Eric
I’m a writer. You gotta be able to marry the two. So, a six-letter word. That word is budget. Yeah, so a lot of people are afraid of budgets. They think budgeting is this bad, horrible, scary thing. I had this ex-girlfriend once, who, you know, I was a new finance blogger and I was trying to get her to do a budget for herself and she like cried when I started talking about a budget. I’m like, a budget doesn’t restrict what you spend, it is a guide that you create for yourself on how much you are willing to spend. So, you know, that’s a little way to think about budgets. It’s not a restrictor, it’s like a guide. And because you set it yourself, you should never feel, you know, horribly restricted. But, you know, to go beyond what a personal budget looks like, if you look at a business’s income statement, at the top section, you’re going to see revenue and revenue-related items.
Doctors moonlight by taking additional shifts for extra income; some use the money to throw at their student loan debt.
Eric
So, revenue in our case, it’s our income, it’s our paycheck. I’m assuming if you’re a doctor, you’re not side-hustling, because you’re already really busy working like twenty-six hours a day and doing like ninety-hour shifts and these crazy things they have you guys do.
Ryan
Believe it or not, it’s different. It’s not freelancing, like how you think, but it’s moonlighting. So, you’ll end up taking on extra shifts in order to do it. So, it is, it’s pretty remarkable. I mean, I’m always in awe of the people that I work with and our friends who are physicians, that, you know, not only are they dealing with the work that they do, and it’s not easy work at all, they, on top of that, they go and moonlight and take on extra shifts for additional income; and if they’re in touch and in-tune with their money, most of them are throwing it at their student debt that they’ve refinanced and it’s just fascinating, you know, that they’re doing these things. Sometimes, you know, I end up coming across a physician that isn’t doing that, but for the most part, it’s just remarkable.
Ryan
See, they end up actually doing the equivalent of freelancing, is what you’re calling it, but it’s moonlighting.
Eric
Yeah, I couldn’t imagine. I know my sister, she’s a general surgery resident and her schedule, I couldn’t imagine adding extra shifts to that.
Ryan
Yeah.
Eric
I think, doctors make me feel like I’m a weakling. Like, I need my eight to nine hours of sleep a night or I get sick and grouchy. I could definitely, not work, you know, nineteen hours in a row and still do a good job. So, my hat’s off to all of you doctors, that you’re able to do this.
Ryan
I completely agree. I could not do what they do. I tell my clients all the time, like, I’m fascinated by how you do it, because it’s, it’s just amazing. So, thank others, people like them, out there, that can do this kind type of stuff, because I am not one of them by any means.
Eric
And I couldn’t even give someone a shot, let alone.
Ryan
I can. I don’t think I could actually, like, I sometimes have trouble, like, getting, like, blood drawn and stuff. I’m just, I don’t know, I’m like a weak, weak person apparently.
Blood draws are the worst (whoops, foot on the dashboard here).
Eric
The blood draws are the worst. Like a shot, at least a shot, it’s like quick and it’s done. The blood draw, you’re like sitting there with the needle or the catheter, whatever they put in your arm…you just like have to sit there in this weird semi-painful state and try to not move. I always end up making awkward small talk with the lab tech.
Ryan
I’m sure they get that all the time too.
Eric
Yeah.
Ryan
Oh, here comes another weakling as they see me walk in and then I’m like okay, just get it done, I don’t want to look at it, like, please hurry.
Eric
I should ask them, what credit cards and debit cards do you use? Are you getting the best rewards?
Ryan
You might make her pass out, or him pass out. Whoever’s drawing your blood. Like, not another one of these guys. Alright, so we’re looking at the…
An income statement might have some work-related expenses on it.
Eric
The income statement. Yeah, so at the top of that income statement, that’s all those revenue and income parts that we were just talking about before we side-barred; and then below that, are all of the expenses you have. And, because you’re a doctor, you know, you might have some work-related expenses on there. A lot of people won’t have that, but if you’re buying, like my sister had to get some of those super-expensive surgery glasses that, like, magnify you when you’re, like, looking at people’s organs that you’re cutting open or whatever you doctors do in surgery. So, those, because it was a direct work-related expense, or like a stethoscope, something like that, if it’s not provided from your employer, you’re going to want to list that for taxes as well. So, remember, there’s extra benefits you can maybe get as a doctor too. But, you know, the higher level, you’re going to see, you know, income at the top expenses at the bottom. You’ll probably want to include student loans in there.
Eric
Even though, you could argue, you know, a business wouldn’t put that in the income statement; they’d put a loan payment on their cashflow statement. So, only part of it would be considered an expense on the income statement. So, it won’t look exactly like a business. I know that was getting probably a little bit in the weeds.
Ryan
Yeah, but the thought is a good thought. Right?
The difference between income and expenses is that one of them lowers your net worth on your balance sheet.
Eric
It’s important to understand at a high level. It’s income and expenses, and the difference between the two is what you get to keep, and that number raises or lowers your net worth on your balance sheet. So, your income statement is for a period of time, not a snapshot of time. So, you could look at it for a month or a quarter or six months or a year. You know; however, you want to slice and dice it, you’re able to do that with an income statement.
Ryan
I mean, that’s great info. So, why did they create this, essentially, we know why they’re creating this. How do they determine how well they’re doing once they’ve created this?
Eric
So, the biggest things you’re going to want to look at, first, is the number at the bottom a positive number or a negative number? Because, at the end of the day, pretty much every personal finance lesson can be boiled down to one line. Spend less than you earn and save and invest the rest. So, spend less than you earn is what you’re going to find out if you’re doing here. If you’re spending more than you earn, you need to change that, like, right away. It’s not sustainable to spend more than you earn. Then, the thing that I like to look at, because everyone’s income and expense situation is different, you can’t just say this number is good and this number is bad, aside from if it’s higher or lower than zero. But, assuming it’s higher than zero, what I like to look at is the trend over time. So, if I compare, you know, the first three months of 2018 to the first three months of 2017, did I make and keep more than I did the year before?
Take the right steps with your finances by making smart choices on what you spend your money on.
Eric
And if that trend is getting better and improving over time, then I know I’m doing the right steps in my finances. There’s so many moving parts in your income and expenses, that can change things, I mean, things ranging from your tax withholdings that you have control over, but not total control over; your student loan payments; your rental or mortgage. Some of those are big costs. A car payment, which, I know it’s really exciting as a doctor to go get a new BMW. Car payments are horrible. You do not need to have one. My car is ten years old and I’m a better person for it. And I have about a hundred thousand dollars more because of it.
Ryan
You’re funny. I’m a better person for it. I love that. That was just standard Eric. I love it.
Eric
Yeah, so, an aging car is a badge of honor as far as I’m concerned. You know, it’s not like you’re driving into a construction site and everyone’s into cars and trucks and they see what you drive up in. Most people don’t care what you drive. So, as long as it gets you to where you’re going and back reliably, that’s all that matters.
Ryan
Yeah, that’s a safe, safe car.
Eric
Yeah, exactly. When I got my ten-year-old car, I wanted the safest one possible, of the lowest cost cars, also reliable. So, I got a Toyota Corolla, but I got the nicest Corolla, so I got like the side curtain air bags and all those important parts, because, like airbags, yes, like that is important.
Ryan
Yeah, let’s get some airbags.
Eric
Like, doctors can understand the importance of safety features in a car more than most people, I think.
Being diligent in saving will really put you in a positive position if you have a negative month.
Ryan
Absolutely. So, Eric, we’re looking at it from a high level here. We’ve got our income. We take out our expenses and we’ve got our net income. And as we start to do this more often, the first time you’re not going to have anything to compare it to; but as we do this more often, whether it’s every quarter, every six months, every year, however they want to look at it, you want to see a trend going up. Now, I can kind of here questions kind of coming in. So, one of the questions I know is probably being asked is, well, in the expense category am I including things like my investments? Am I including things that, you know, would be stuff that I want to save that, we went and took our trip and, you know, our annual Hawaii trip and that was an expense that kind of kicked in. Let’s say they’re doing this monthly and they had a negative month, but they had been doing the diligent thing and saving the whole time. You know, how can we address maybe a few of these, you know, extra that maybe we didn’t discuss yet?
Eric
Sure. Yeah. So, there’s a few different philosophies for how to handle a couple of the different situations you mentioned. So, one I’ll mention, also another app that we haven’t talked about yet, YNAB, You Need a Budget. That’s another great budgeting app. It’s not free. Like, everyone we’ve mentioned so far is free. This one is, I think, five dollars a month or sixty dollars a year, or fifty dollars a year. They might do a discount if you do one year up front. But, it’s free for over a month to try it out. So, you can get your feet wet with it, without spending any money to decide if it’s right for you. What’s cool about YNAB, is it uses a philosophy of every dollar gets a job in your budget. So, the income statement, you’re really looking at, you know, it’s backwards looking at what you have earned and spent; whereas, the YNAB approach, you’re also looking forward at future dollars you’re going to earn and you assign each dollar a job.
If you want to save up for something in the future, it’s good to review your income statements over a longer period of time.
Eric
So, that job might be, you know, helping with housing or health insurance or some other recurring expense…your cell phone, whatever. Some of those dollars are going to be going into future expenses like, maybe you’re saving up for a big trip to Thailand next year or maybe, you know, maybe you have kids and you’re saving up for the holidays throughout the year. Maybe you want to put away twenty dollars a month for a present fund or something like that. So, yeah, then in December or November when you go spend all that money, if you look at that month in a nutshell, it might look like you spent more than you earned for that short period, but that’s why I like to, you know, look at income statements over longer periods of time often and compare year over year, rather than just month over month, because if you want to save up for something in the future, that’s a good thing. You know, having goals and saving and working towards those goals, I would say in general, in finance, is a good thing.
Eric
You know, you don’t want to try to save up for goals that are, you know, not good financial goals; and ultimately, a vacation is only going to cost you money and most things you’re saving for are expenses. So, they’re not going to give you any long-term benefit back, but that’s okay. That’s why we go to work. It’s okay to have things you enjoy and spend on things you enjoy, as long as you have budgeted for them and can afford them. Actually, there’s a quote, I quote her a lot. Actually, she’s another Las Vegas finance blogger in your neck of the woods, Paula Pant. Her site is Afford Anything. She has this great quote that I wish I had come up with myself. It’s “You cannot afford everything, but you can afford anything.”
You can afford travel if you shift around your spending.
Eric
And, that says it all to me. You know, it’s so true. Let’s say your big thing in life is travel, which, you know, for me, travel is a huge priority. You know, that’s okay. I can spend money on travel. It’s just how can I afford that travel? I either have to earn more or shift around my spending, so I’m cutting spending somewhere else to make sure I can afford that. Like, I really don’t care about TV all that much. I cancelled TV. I had cable through 2011. I cancelled it, now it’s coming up on a decade. I used to pay seventy dollars a month to Comcast to sit and watch TV, of which about a third of the time I was watching commercials anyway. I can complain about TV all day. But, when I cancelled my cable, my life got better in a bunch of ways. You know, one, I started going out and being social with humans more often. One, it gave me time to do things that I valued more, which for me was working on my business.
You can achieve your goals by knowing and keeping yourself accountable to your priorities.
Eric
But, it also saved me seventy dollars a month, which over, you know, over years, that’s been, at this point, last I added it up, it was over five thousand dollars I’d saved that I could have spent on TV. So, five thousand dollars of savings, you know, I could, if I were hosteling it or going super budget, I could spend a month or months abroad with that savings. So, don’t think about, you know, what constrains you from reaching your goals. If they’re expensive goals, just think about what do I have to trim or shift around in my priorities to reach those goals? Because when you look at your budget, when you look at that income statement, ideally, you’re going to have some details broken out on where all of your money has gone by category. And, a lot of people I find, the first time they do a budget, they get a big wakeup call and a big surprise, because these apps, like we’ve mentioned, you know, Personal Capital and others, they will automatically categorize your spending if you use a credit or debit card and link that.
Lots of people spend money at restaurants, especially millennials.
Eric
And when you look at your spending, you might say whoa, I spend, you know, twice as much at restaurants as I thought every month, which is very common, particularly for millennials. They spend a lot of money at restaurants. Most Americans, it’s very common to spend a lot at restaurants, but if you’re spending more at restaurants than you realized, okay, so now you realize it. Now you understand it. You can make that decision is going to restaurants worth this much money to me or is there something I want more than going to a restaurant? Or maybe I just want to go to restaurants less often so I can go to a nicer restaurant on occasion. You know, it’s up to you. It’s your money. That’s why it’s called personal finance, it’s personal. There’s no hundred percent right or wrong, it’s just making sure you can afford the priorities that are important to you.
Eric
And if you can’t afford those priorities, it’s about making whatever adjustments you need to make, which I’m guessing for a doctor, they’re not going to be that big in the long run. In the short run, they might pinch a little more while you’re still in your residency, but you probably don’t have that much time to spend much money when you’re in your residency anyway.
Ryan
Yeah, that’s a factor for them. You brought up a good point here, Eric; and I actually look at it and talk to my clients on this and say, you know, and I love Paula’s quote. I think it’s an amazing thing that she came up with. I wish I would have, absolutely wish I would have created that one. But, as we’re looking at it and I say look, there’s a lot of things you can do with your money. And some of your money is assigned already. And what I’m talking about is fix expenses. If you earn a hundred dollars, hopefully your fixed expenses aren’t more than fifty or fifty-five percent of your actual spending, your take home pay. But that still means that, let’s say it’s fifty, fifty dollars of that hundred dollars is already spent, whether it’s rent, student debt, mortgage, TV, internet, cell phone bill, whatever it is. Things that are recurring that are automatically coming out of your bank that’s already spent.
Look at your fixed expenses to help you focus on bigger investments.
Ryan
So, now you’ve got fifty dollars left. Hopefully you’re spending twenty-five of that on paying yourself first. And what I mean by that is, actually saving money in your IRA; saving, maybe, additional money in your taxable account; saving money for the, you know, the one or two trips that you really want to go on if you’re a big traveler; or if you needed a new car. Things like that, that you’re saving for specifically and then hopefully it’s twenty-five percent or less, is going to be kind of that variable spending. And I know that it’s like one of those common memes out there; well, stop buying the Starbucks and you’ll become wealthy. Well, you know, probably not. You should look at your fixed expenses first and make sure that…
Eric
It’s the avocado toast.
Ryan
Oh, sorry. It’s the…I can’t even keep up now. But, you know what I’m saying? You look at your fixed expenses first, because that’s the biggest bang for your buck. And there’s like, really like, kind of like the big three that you have, but if you can lower those and make sure that you’re not spending too much money on the fixed side, then it opens up and says okay, well, I’ve kind of paid myself first. And not only does that mean investments, that means some of the goals that I want. When you’re putting things into perspective and saying well, the things that make me really happy, the things that I really want to do or experience or own, whatever it might be, everyone, again, is different; but whatever it is that makes you really happy, that becomes a yes, and it should make it a whole lot easier to say no to all the other things that don’t make you as happy to what you’re going to say yes to.
Make a decision about what really makes you happy.
Ryan
So, as you kind of work through it, and I think YNAB can help with this, even just good old fashioned Excel, if you really wanted to do it. If you wanted to upload everything into Personal Capital, you could. All these tools will help you kind of get there, but you’re ultimately going to need to make the decision of what is it that actually makes me happy? I know that in town here, you know, the Raiders are coming, and I don’t know if you’ve caught wind of this or not, but they’re building this nice billion-dollar stadium and all these things, and they laid it on all these new season ticket holders that there’s going to be a cost to entry and upfront fee, just to get you in line to buy a ticket. I think it’s ridiculous, but if someone is a diehard Raiders fan, and that is exactly how they want to spend their money, and that is the most important thing to them; yeah, it’s probably not the best financial decision, but if that brings them the most happiness, then they should say yes to it. But, what are they not going to have to say no to? You can’t just say yes to everything. Right?
Ryan
It’s kind of like that “you can afford anything, but not everything.” You can afford, potentially, the Raiders tickets. Right? But, what are you giving up? Are you going to have not as nice of a house? Are you not going to upgrade your car in the next few years? Are you not going to take a couple of vacations that you typically would have taken, but that money now got used up to buy the Raiders tickets? And, just for the record, we’re talking like, the entry fee is like fifty or seventy-five thousand dollars to buy these things. It’s absurd.
Eric
What do these people do that they could afford to just blow a hundred grand on football tickets?
Spend your excess money on what makes you happy.
Ryan
I know a lot of casinos are buying stuff up, but there’s a lot of people that are here buying them, and it’s kind of the talk in town right now, and I’m just like shaking, going I couldn’t do it even if it was the Chiefs that came. That’s my team for football. Even if it was the Chiefs, I couldn’t comprehend it, but you know what, if that makes someone truly happy and that’s their number one thing over a nice house, a nice car, traveling, you know, as long as they’re getting their investments together, you know, and kind of doing the right thing and saving the right stuff; if that’s how they want to spend their excess money, who am I to tell them that’s a bad idea?
Eric
I would never do that, but that’s more power to you if you love the Raiders that much.
Ryan
Absolutely. Right? And, that might be your travel. Right? Maybe they hate traveling. Maybe you love traveling and that’s the equivalent of it; and I know the dollar amount is all kind of relative. If you’re making fifty thousand a year, you can’t comprehend this. If you’re making five hundred thousand a year, you could easily comprehend how this could work.
Spending one-hundred thousand dollars on football may not be such a good idea, unless it makes you happy… then there you go.
Eric
If I’m making five-hundred thousand dollars a year, I’m still not going to spend a hundred thousand dollars on football.
Ryan
Absolutely. But, you know, that’s not what you’re saying yes to.
Eric
I spent seven thousand dollars a couple of years ago to get my pilot’s license. A lot of people would think that’s ridiculous and a stupid use of money. I think it’s so cool, because I can fly an airplane.
Ryan
Yeah. So, maybe the number is a little bit bigger. If I would have said hey, the Raiders tickets are seven thousand, and you would have went like no, but I’d want to go get my pilot’s license for seven thousand, like if we just made the dollar amount equal.
Eric
Yeah. It’s prioritization and that’s really what it’s about.
Ryan
That’s exactly what it’s about.
Don’t keep up with the Joneses. They probably have ten grand in debt. Do what makes sense for you.
Eric
Like you said, like you mentioned coffee, it’s really easy to pick on coffee, but if you really love your, you know, your daily Starbucks enema, go for it. If you think it’s worth five dollars for a cup of coffee and that’s your thing, and you love your flat white or mocha chino or, I don’t know, I’ll just make up some random coffee.
Ryan
It probably is a coffee, even if you think you’re making it up. Yeah, if that’s your jam, like, if that’s what you really love, and that actually makes you really excited, and puts you in a better mood, and gets you going, like, by all means, do it.
Eric
So, what are you going to not spend to have that five dollars for the coffee? And also remember, you know, one place, something that we’re all susceptible to is, you know, the idea of keeping up with the Joneses. You know, everybody looks at the next guy over, whatever their friend’s into, and they want the same stuff. You know, it’s just human nature to want to keep up and compete with others. But, don’t keep up with the Joneses, because the Joneses probably have ten thousand dollars in credit card debt. So, forget about the Joneses. It’s about what you think is important, not what anyone else thinks is important.
Flying makes Eric happy.
Ryan
Exactly. It’s what makes you happy. Right? And, clearly, we know Eric, it makes him happy to get his pilot license, and it could be that someone here in town, it’s not the pilot license, it’s Raiders tickets.
Eric
And a lot of doctors would probably say that was an even worse use of money, because it could be dangerous.
Ryan
You never know. I mean, some people skydive. I don’t know, I mean, it’s however you want to…
Eric
I’m never jumping out of a plane.
Ryan
I’m terrified of heights. We learned a lot about us today. We’re afraid of blood and, you know, getting our blood drawn and jumping out of planes, and we just sound like big babies here.
Eric
I’m not afraid of other people’s blood.
Ryan
I don’t like blood in general. It’s just not me.
Eric
I guess I’m afraid of other people’s blood if I’m, actually, my sister’s about to do Doctors Without Borders in Africa for six months; and my only real worry about her going there is, you know, blood transmitted infections. So, like, I’m not worried about your, like, general safety in Kigali. I imagine it, I’ve read it’s a pretty safe city, but you doctors, you have way other risks than I have on a day-to-day basis. My biggest worry is like Carpal Tunnel from typing too much.
Curbside Consult Question – What are some helpful tips or tricks that you would have as advice to this person wanting to actually do this for the first time?
Ryan
Carpal Tunnel. As I sit here and envision you typing. That’s hilarious. So, Eric, I do something on the show, where I tend to ask one or two questions at the end. I call it curbside consult. So, I’m going to ask you a quick question here, if you don’t mind answering this.
Eric
Let’s do it.
Ryan
So, we’re looking at it and our listener here today, let’s say is a resident, and they’re like you know what, what Eric is talking about, I really should start this now. What are some helpful tips or tricks that you would have as advice to this person wanting to actually do this for the first time?
Start NOW.
Eric
Just start. I mean, it is so easy to get stuck in analysis paralysis mode, because we talked about four or five different apps today that could all, more or less, help you do a similar thing. So, you might get stuck thinking oh, which one’s right, which one’s, and all of a sudden you just don’t do anything. Like, just pick one and enter your info. You know, even if you’re working a twenty-four-hour shift or whatever you’re doing, a lot of these apps, you can just download for free on your phone and get started. It takes, you know, fifteen minutes. Let’s say you have one investment account, credit cards at two different banks and bank accounts at two different banks. So, that’s five accounts to connect. You could probably be setup in ten minutes-ish. So, just do it. You know, don’t wait and schedule hours of time. You don’t need hours. You just need, you know, fifteen minutes and you can get started.
Get your apps up and running right now.
Ryan
Perfect advice. So, essentially, you know, link up accounts, let it start running and collecting that data, if you will, and, you know, maybe when you have a little more free time, you can jump in and start analyzing the data and, you know, mid-maxing it, I guess you could call it; and trying to get a little more, you know, in-depth on it. But, just start. I think that’s great advice. So, Eric, where can our listeners hear more about you, listen to your great show that I absolutely love and read what you’re writing as you’re getting Carpal Tunnel?
Eric
Yeah, sure. Yeah. And, hopefully if I do get Carpal Tunnel, one of your residents will be able to do the surgery to fix me. Right? Or maybe not need a surgery. Ideally, you could fix me without; although, I know you make more if you cut me open.
Ryan
Conflicts of interest already.
Sign-up for Eric’s FREE 7-day Personal Profitability Bootcamp!
Eric
Totally. I’ll just keep taking Advil for now. You know how that goes. Yeah, if you want to connect with me and learn more, the best place to go is personalprofitability.com. I have both a blog and podcast there. The blog is almost ten years old. So, I feel like a dinosaur in blogger years. And the podcast, anywhere you find podcasts. I actually have a give-away also, for you guys, because you were listening today. I have a Personal Profitability bootcamp that is totally free. It’s a week long. You get an email from me every morning for that week, with a link to a video that’s about ten to fifteen minutes long, to help you get on your path to personal profitability. You can sign up personalprofitability.com/bootcamp and get started there. Like I said, no strings attached. It’s free and I’d love to see you there.
Ryan
Awesome. Well, I’m actually going to go sign up for it, because I didn’t realize that you had that going. So, I’m going to check it out. I’ll make sure I link all this stuff in the show notes, you know. Eric, thank you so much for being on. It’s always a pleasure to hang out with you.
Eric
Thanks so much for having me. It was a lot of fun and doctors keep at it. You’ve got a great financial future ahead.
Ryan
Awesome. Thank you, Eric.
