Why Every Physician Needs a Budget and How to Create One Worth Following
Have you been trying to figure out how you can be more successful with your money management? Creating a personal budget for physicians is hardly a radical idea for financial success – but it’s an important topic and one that deserves the attention of every doctor.
Is a budget a groundbreaking concept in the financial world? No. Is it the sexiest topic to discuss with your spouse? Definitely not. But when utilized correctly, a budget lays the foundation for successful planning and ultimately, fiscal growth.
Whatever your money goals are, chances are you won’t be able to achieve them without the help of a budget. It’s time to look at a plan in a completely new way – starting now. Let’s explore not only why a budget for physicians is more important than ever, but also how you can easily incorporate one into your financial game plan.
Why a Budget for Physicians is So Important
Some of you reading this information are right in the middle of the residency grind. You’re used to deciding where a limited amount of funds should be carefully spent each month. Others of you are finally reaping the benefits from your years of training and commanding a six-figure salary within your specialty. So which one of you needs a budget more?
The answer is both.
The simple fact of the matter is, no matter how much money you’re bringing in each month, you need to know exactly how it’s leaving your wallet. Not only does knowing where your money is going empowering, but it’s the best way to make your money grow.
A common misconception of a budget is it’s designed to be constraining and restricting. It’s almost as if your budget is hovering over you, ready to pounce on you the moment you slide off-course. And for someone who’s pulling in a substantial income, it can almost feel like a waste of time.
Here’s the thing- budgets for physicians are the complete opposite of this type of scenario. It’s deeply personal and works the way you command it to. Think of a budget as a set of guardrails for your money. If you happen to screw up, you can reference the guardrails you’ve put in place, and get back on track.
Behavior and Budgets: How They Impact One Another
Let’s take this concept of a budget a little deeper. While we can definitely change our behaviors and create new habits, it’s important to understand why we do things the way we do. Otherwise, we’ll never be able to change our actions.
We all know there’s a plethora of advice available whether you want to retire, invest, budget, or buy. But it seems like the information on attitudes and emotions with finances is a little tougher to discuss. When you think about it though, your thoughts about money and budgeting had to start somewhere.
Whether you realize it or not, there are a lot of emotions tied to our spending and saving habits which could also affect your attitude towards a budget. You typically learn your attitudes about money from your family and your childhood experiences with money. Think about the ways your childhood memories regarding finances have influenced your current-day attitude.
But there’s also a positive side to associating emotions with spending behavior. If you were exposed to positive money spending habits as a child, then it’s likely you’ve carried those positive behaviors with you into adulthood.
Behaviors and attitudes about money aren’t limited to what our parents taught us either. Many beliefs are shaped by our first experiences with our own money- either an allowance or a part-time job. How did you feel when you received your first “paycheck” for your work? Did you feel independent, empowered, guilty? Some kids want to splurge with their first checks, others want to hang on for dear life.
Another way to think about behavior and finances is how our attitudes about money may lead us down a path of avoiding financial decisions. It’s not uncommon to feel overwhelmed by the numbers and use it as a reason to avoid making decisions about finances.
All of these different feelings could play a part in your desire to create a budget or run as far away as possible from one. You may not have all the answers as to why you feel a specific way about your money habits. But you can start the process of better financial management by acknowledging your behavior towards finances are mostly rooted in the past.
Now it’s time to focus on your present and future finances – and a personal budget is how you start.
Where do you begin to build this budget? You may be tempted to start by throwing a bunch of numbers on a piece of paper and quickly add things up. But before you can tell your money what to do, you need to figure out your motivation.
The very first step to establishing your budget is to write down your financial goals. Set aside an amount of time where you can concentrate and focus solely on the task of goal setting.
This may be a tougher step for you than you realize since you’re a busy physician that barely has time to think. But this is too important of a step to rush through. How will you ever know what all your hard work is intended for if you don’t have goals you’re working towards?
You definitely want to set goals for at least the upcoming year. Ideally, you should go ahead and plan what you’re working towards for the next three to five years. But don’t get hung up on the timeframe.
You should also consider what your retirement goals are. Ask yourself if you’re content working until at least age 65 or if you think you’d like to practice past then? If the thought of working until then doesn’t sit well with you, then start thinking about what age you’d like to retire. Is it 5 years earlier? 10 years? Whatever the age is, if early retirement is your end game, then you need to define the goal.
Financial goals aren’t always tied to retirement either. Go ahead and think about your goals for paying off credit card debt, student loans, or saving on a down payment to a home. Your goals could also include taking a vacation or purchasing an investment property.
If you’re married, this is the time to bring your spouse into the conversation. It would be harder to achieve your goals if your spouse isn’t on board or doesn’t understand your vision. Maybe you won’t have all the answers, but use this as an opportunity to discuss what you both want. Don’t be afraid to set this time aside and make it even more interesting. Not every financial conversation has to take place at the kitchen table. If you need to, make an evening out of it and discuss it over your favorite meal.
Setting goals is an essential part of creating a budget you can actually use.
Analyze Your Spending
The second part of developing a useful budget for a physician is to understand exactly how your money is being spent. You need to know exactly what’s going on day in and day out. You may think you have a good idea of how much you spend on gas or groceries, but until you do a deep-dive then you won’t know for sure.
1. The Analysis
Establishing your budget means you need to analyze your spending. My recommendation is that you take one month and write everything down. And when I say everything, I mean everything.
Don’t forget to include the small items, the ones you always forget about until they send you a reminder. Things like extra storage in the cloud, the unlimited music subscription, any item no matter how small or big.
You can track this with a spreadsheet, write it down on legal paper, whatever works for you. If you share an account with someone, then make sure you’re capturing that information as well. Even though you’re looking at your expenses for one month, it’s important to go ahead and identify the big yearly expenses you have as well.
Examples of yearly expenses could be the Amazon Prime Membership, the HOA dues you need to pay, the premiums for your car insurance. There are multiple bigger ticket items which really impact your spending but can be easily overlooked since it happens infrequently.
2. The Review
The next step in the analysis is to review everything you’ve captured. Reviewing this information needs to be judgement-free for both yourself and your partner. Don’t be tempted to use this time to point fingers or assign blame. Think of it as an opportunity to see where you can improve.
How does this information about your spending strike you? Are you paying more for television then you realized? What about your cell phones- are you shocked at how much money you devote each month to the cost of owning a smartphone? Maybe the amount you’re spending on eating out is more than you have been telling yourself.
Maybe your expenses aren’t surprising but perhaps you can clearly see you’re overpaying for car insurance or some other service. When you see it written down, especially compared to other items, things you’re overpaying for may begin to stand out.
The last part of the analysis is to identify what you think needs adjusting. Highlight the items you know you can finally get rid of or items you know you’re overpaying.
Make this adjustment phase even easier on yourself by going after the simple tasks first. For example, if you know you’re paying for a music streaming service which can easily be canceled via a click of a button, then go ahead and take care of this one first.
If you know you need to call your insurance agent and negotiate a better rate, then put it on your calendar and create a task to complete it by a certain date.
If you’re not convinced this is worth the effort, then add up how much these extra fees are costing you for an entire year – not just one month. Looking at it through a monthly lens might not make as much of an impact.
Let’s say you find a way to easily cut $110 out each month but you wonder if it’s worth the effort it takes to make these changes. But ask yourself if you would you ever hand over a check to someone for $1320 ($110 for 12 months) if you didn’t know what the money was going towards?
You can really drive home the point by converting this $1320 into an investment, and seeing how this $1320 could eventually grow into a nice chunk for retirement.
Develop the Budget
This next step is great for the analytical types or the creative types. It’s time to create your new budget! This is where you remind yourself how creating a budget is very personal. Make this work for you and your personality.
Develop this budget based on the fixed monthly expenses and your goals. Assign an amount to help you reach your short-term and long-term financial goals. Give everything a name and a category. Make sure you include items for living! If you hate cooking and want to spend money on meal kits, then go ahead and include it.
You need to tell your money where to go.
This is where it can become deeply personal for you, based on your preferences. A budget can be created based off your entire monthly income. It could be developed and written out paycheck to paycheck. You may even prefer the cash envelope system where you pay for everything with cash (as much as possible) out of the funds set aside in the designated envelope.
A budget isn’t only about a system of spending and saving either. You have to find a method for looking at the information and having the info at your fingertips.
Do you prefer everything to have a place and look orderly and crank out formulas for you? Then a spreadsheet could be the best solution.
Do you like seeing your monthly spending data in charts or bar graphs? Then an app is a great place to start. You can even find printables to download online and then all you have to do is fill out the information. Again, you choose what works best for you and what you’re most likely to stick to monthly.
Whatever you choose, don’t let this step drag on. Create the budget and go. It’ll be too easy to get caught up in the development of this step. Remember, if create a spreadsheet and find it’s not working, then switch to an app. You’re not obligated to any one type. You have to find what works best for you through trial and error.
What Should a Budget for Physicians Include?
While a budget is as unique as the person who’s creating it, there are guidelines to consider as you go about setting it up. Even with all the different ways of analyzing the data, the concept of the budget is straightforward.
You have your living expenses each month which rarely change. Think of these as your mortgage or rent, your car payments, student loan payments, utilities, and other items you can expect each and every month.
You also need to identify which expenses occur weekly, monthly, quarterly, or annually and make sure you account for them in your overall budget, whether these are fixed or variable expenses.
You should also spend time creating a framework for your spending. An easy way to remember how much of your paycheck should be allocated to these expenses each month is into 3 main categories:
- Allocate 50% of your take home pay to fixed expenses
- Allocate 25% of your take home pay to the variable expenses
- The remaining 25% you should target for savings
These are all guidelines, but identifying your expenses as fixed, variable, and savings, helps make it easier to see where you could eventually make changes to your budget.
Small Changes Can Lead to Big Savings
When you combine all your financial goals together, the end may feel as if it’ll never happen. Let’s face it, if you were told you need to pay off your student loans, purchase a home, save for retirement, all while controlling your living expenses, then you’re going to feel overwhelmed.
When it starts to feel overwhelming, then remember the small changes are leading to big savings and achievement of your goals. If you’re able to cut out $150 a month from things you won’t miss at all, then you could put the amount towards your goal of paying off your credit card. Doing this monthly will not only reduce your debt by $1800 per year, but you’ll be reducing the amount of interest you pay over the life of the card as well.
Yes, your financial goals will drive the overarching need for your budget. You’ll have a target you’re trying to hit and a budget provides the target for you to aim towards. The small changes are the ones which hurt the least, and you’ll barely notice they’re taking place. Over the long run, it’s the small changes which help you hit your financial targets.
Creative Ways to Save Even More
You’ve set your goals, analyzed your spending to death, and created a budget that would make Dave Ramsey jealous. You add all the numbers up and no matter what you do, you still can’t cover all the expenses and achieve your financial goals.
This isn’t the time to give up and feel sorry for yourself. It’s time to get creative and start thinking of how you can change your income or your expenses. You can change your situation by taking on a side hustle or making bigger sacrifices to your expenses.
The great news with this is that there are so many creative, legitimate ways for you to pull in extra income. Whether it’s pulling in locums work (make sure you’re not violating the terms of your contract), or renting out your house, or driving for a rideshare. You could also look at renting out your place if there’s a big conference or annual event in your city, like a big golf tournament or large convention.
Maybe taking on additional work, no matter what type of work it is, isn’t a possibility. If you’re still struggling to cover all of your expenses each month then you need to look at making a major change to your expenses.
If your car is adding up to be a small fortune each month, you could consider selling it and taking public transportation or driving a much less expensive car. You could look at all your options for childcare and make sure you’re using the best choice for your situation. If you’re renting, maybe you consider moving to a less expensive place. While none of these options are terribly exciting, if you need to do something radical to achieve your goal, then these are places you can start.
Important Items to be Included in a Physician’s Budget
The bottom line is, a budget for physicians is going to look different than someone who’s working in a different profession. There are several items a physician needs to include in their monthly expenses which might not be included in someone else’s line of work. Here are the items every physician needs to make sure their budget is not only including, but maximizing.
1. Disability Insurance
Adequate disability insurance is a non-negotiable for a physician. Many people forget how physically demanding to be a physician is and how an accident, injury, or illness can suddenly change your income.
Statistically speaking, you have a one in four chance of needing to file a disability claim prior to the age of 65. As if that’s not alarming enough, the chances of a physician filing for disability are double the rate of anyone else! With those two statistics alone, you don’t want to take a chance with your finances and rely solely on your employer for insurance.
Adequate disability insurance with the right conditions (also referred to as Riders) needs to be included in your budget. As a rule of thumb, male physicians should plan to spend 1-3% of their annual gross salary on a disability premium, while female physicians should budget 3-5% annually.
It’s definitely worth your time to dive into the subject of long-term disability insurance. Not only will it make sure you and your family are covered if you can’t work, but this is an important piece to overall financial success.
2. Life Insurance
Often times as a physician, you’re the breadwinner of your household. While not an uplifting topic to dwell on, life insurance is an important piece of your financial picture. Having the proper life insurance policy covered in your monthly budget, is an important way to make sure your family’s needs are met should something happen to you.
You need to think about what expenses you would want your family to have covered if you were no longer here and working. Add up the expenses you’re looking to cover, such as a mortgage, funeral expenses, college education, outstanding medical school debts, whatever you think is necessary. Once you have the number in mind, you can work backwards to determine the amount of coverage you need for life insurance.
I recommend physicians stay away from whole life insurance and instead purchase a term policy. As a general rule, you’ll want to purchase a policy which replaces your income for 10 years.
The premiums for a term life insurance policy vary as widely as the coverage options. The amount you pay each month will depend on your medical history, whether or not you’re a smoker, family history, etc. You should be able to find an affordable option for term life insurance that fits within your budget.
3. Retirement Savings
Obviously, there’s quite a bit of focus on retirement and finding your magic number to start your golden years. There are millions of blog posts, articles, videos, web-sites all dedicated to this one topic.
While you’re developing your budget, you need to make sure you’ve taken into account how much of your paycheck is devoted to retirement. You may not have every retirement goal completely mapped out yet, but you should have one or two targets you’re working towards.
In addition to what you’re saving from your take home pay, are you taking advantage of every possibility through your employer? Have you maxed out your 403(b) or IRA contributions for the year? Each year you need to make sure you know the maximum contributions allowed and then find a way in your budget to max out your own contributions.
Not only will you be building your retirement nest egg, but you’ll be reducing your tax burden. As a physician with a high income, it’s important for you to take into consideration all the ways you can affect your tax liability. This is another reason to work with a fee-only financial advisor or consult with a CPA about the various ways you could reduce how much you owe for taxes.
Now is the time to consider bringing on a fee-only financial advisor. You need someone in your corner who’s providing the most sound advice without selling their products.
4. Car Insurance
Car Insurance – or adequate coverage – is another critical component for physicians. The fact is, it’s common knowledge physicians generally are paid a high income. Many people assume because you’re a physician it must also mean you must have a high net worth.
Sadly, it’s these types of assumptions which make physicians a prime target should they be involved in a car accident. This can make it more tempting for someone to try to sue you or get as much money as possible. Take time to review your car insurance coverage. This isn’t the time to skimp either.
These are all important factors that you want to make sure you’re considering as you’re building your budget. You’ve got a lot of things to think about, so how are you going to keep track of it all?
Best Apps for Budgeting
If you need something both you and your spouse can reference throughout the month to help with ins and outs of budgeting, guess what? There’s an app for that. Apps are a great way to help keep your budgeting categories and track every single expense. Here’s a look at a handful of popular apps to help get your budget tracking started.
One of the most popular options for a personal budget is the Mint app. Many users of this app love it because it’s a free option. You and your family can synchronize your expenses as needed, while keeping track of everything coming in and out of your account. You can also use it on your phone, tablet, computer, wherever your busy life takes you.
With Mint, you connect to all of your accounts – either checking, savings, or investment – and you track every single charge placed against your account. You can then export the information into helpful tools such as graphs and charts. You can setup the goals so you can also track towards your personal financial goals and monitor your progress.
Mint was developed by the Intuit Company, the same company which makes Quickbooks. This is one reason why Mint is able to offer so many options and categories for your budget. You can also set this app up to alert you anytime you overspend in a category (based on the information you setup).
Mint is a great option for those who need to visually see how their expenses are tracking each month. The fact it’s free and offers you customized alerts is icing on the cake.
2. Tiller Money
You may not have heard of Tiller Money yet, but if you prefer the look and use of a Google Sheet then you’ll want to try Tiller. Tiller Money was created for those who like to create a budget using a tracker in the form of a spreadsheet but also have access to your data in real-time.
Like the Mint app, all of your data is secure and in real-time. You can easily access your expenses at your fingertips at any moment.
What makes Tiller different versus other personal finance sites is the ability to add and edit categories. You can also create very specific alerts and reminders. Basically, you can achieve a more granular level with your budget using Tiller Money.
Another distinguishing factor with Tiller is there is $5 monthly charge to use this system. Many users of this app are willing to pay this extra amount for the level of detail and ease of editing.
A third option for a budgeting app is the You Need A Budget App – or YNAB for short. Users of this app like to tout it as the digital version of the envelope system. Like Tiller Money, there is a monthly fee to use this service.
With YNAB, you have to assign every single dollar to a category. There are several color-coding options for your categories. The app is also especially easy to use if you pay cash for expenses – you can easily add in a manual entry.
Users of this app swear by its ability to identify items which wreak havoc on your budget. It forces you to look ahead at all of your expenses and set aside money for them each paycheck. This is a critical step for people who feel as if they’re constantly living paycheck to paycheck.
4. Personal Capital
Personal Capital is another widely used app for personal finance, it focuses on both your monthly budget as well as your investment accounts. This is a free service to access.
On the mobile app, you can monitor your expenses and use the Cash Flow Analyzer Tool. You can receive alerts and email notifications as well as view upcoming bills.
What sets Personal Capital apart from other apps is the investment account information. You can utilize a fee analyzer for your retirement accounts, get investment checkups, even find out where you’re over or under-indexing with your accounts. There are also tools to track the cost of a college education so you can start factoring the costs into your budget (if this is one of your financial goals).
Getting the Family Involved With the Budget
Going through this process of creating and implementing a budget is going to take extra effort. There could even be days when you feel like your hard work is not leading to anything real. This is the time when you need the support of your family.
Family support for a budget can look like a couple of different scenarios. If you’re married then you’re going to want to make sure you’ve discussed your goals and made plans together. If you have children, it’s ok to be open about your goals as a family and what it takes to achieve the goals. Depending on their age, you should get them involved in the discussions.
Get creative, especially with the kids. Encourage them to set goals and rewards when they achieve a financial milestone. Getting the family involved will let everyone know how important financial management is for the family.
I Have a Budget, What Now?
It’s important to monitor your expenses and review your budget on a regular basis, including with your family. If not daily, then as often as you think necessary.
Having a complete budget for physicians is one thing, but if you can automate a few different areas, then you’ll be amazed at how quickly you can achieve your financial goals.
1. Establish Sinking Funds
A great way to automate your savings and make sure certain funds are earmarked for specific goals, is to setup sinking funds for each of your goals. The concept of a sinking fund is simple – you determine the yearly amount needed for your goal and then you have the amount automatically withdrawn each paycheck.
The idea is you take a little from each paycheck, have it automatically transferred, then in 12 months (or whenever the amount is needed), you withdraw it to use towards a specific item. Many people setup online accounts to transfer the money into, which makes it out of sight and out of mind.
For example, let’s say one of your goals is to go on a family vacation each year and you want to budget $6K for this big trip. If you establish a sinking fund, then you would have $250 transferred from each paycheck (assuming 24 paychecks per year), and moved into an online savings account. After a year, you would have the $6K needed for vacation.
You could apply this same methodology to Holiday and Birthday Gifts, Car Maintenance and Repairs, Home Owners Association Dues – anything above your typical monthly expenses. You could also use this concept for the goals you’ve established when initially setting up your budget.
2. Automatic Retirement Savings
The best thing you can do for building your retirement nest egg is to automate the process. Similar to the concept of a sinking fund, you should automate your savings for retirement as much as possible.
You can set up automatic transfers for your employer-sponsored retirement accounts, IRA’s, and for investment accounts. This is part of paying yourself first. The more you can automate this type of savings, the quicker you can watch your savings grow.
3. Review and Check-Ins
Even though a budget will be utilized every month, you’ll want to set specific times on your calendar for a financial check-in. You could do this every 6 months, or quarterly – whatever works for your schedule. It’s important to see how you’re tracking to your goals, what categories need tweaking, and if your goals have changed.
If you’re married, definitely review the information with your spouse. You can go out to dinner and have a money date to review the information. Make it fun and be mindful of the goals you’re accomplishing together.
No matter which way you choose to automate and update your budget, you’ll be giving yourself the best opportunity to achieve your personal financial goals.
A Budget for Physicians Is a Tool for Financial Success
When it comes to personal finance, you’ll be hard-pressed to find a subject more widely discussed than budgets. The simple fact is, a budget is an important tool which should be utilized by any physician with financial goals – no matter how much your monthly income is.
You may feel like you’re too busy or you’re finally earning enough of an income to not have to worry about monthly finances. If anything, it’s even more important to employ a budget when you have a high income. It’s too easy to allow lifestyle creep to occur while losing sight of debt repayment, retirement savings, or other financial goals.
Are you looking for easy ways to keep learning about maintaining a budget as a busy physician?
Subscribe to the Financial Residency podcast via ITunes or connect with the Financial Residency Facebook community. You’ll quickly see there are many physicians in the exact same situation you are, trying to learn how to practice medicine and sound financial management at the same time.