Budgeting For Doctors – A Must To Reach Financial Independence Early
I mentioned in a recent post that auditing my expenses for 2014 showed that expenses each month was over by almost $1,500. For rent, groceries and entertainment I was already spending nearly $1,800. It’s easy to miss because some months those 3 categories were low but I might have purchased something for the bicycle or renewed a medical license etc.
An ideal budget for me would be under $2,000. Of course there has to be a balance. Each person or household has to find a middle-ground. Though when in the wealth accumulation phase it’s crucial to decrease expenses and increase savings. Time allows your money to grow and compounding interest will help you a lot in the long-run.
From a little deeper perspective I don’t like to become dependent on spending. It’s quite normal and healthy to pay for lodging, quality food and for socializing. But it’s not healthy if I build a home that’s so extravagant that I don’t ever want to leave it… that would completely disconnect me from other human beings. Same with food, spending too much there will either get me overpriced food or fat.
Let’s Talk About YNAB
It’s a web-based program (transitioning away from being software based) that can communicate with your bank account and credit cards and import transactions. Nothing fancy there, plenty of other online sites let you do that. The genius of YNAB is how it looks ahead. You don’t look back at what you spent but instead plan ahead… that’s really tough to do.
You sign up with YNAB and either pay the annual fee which was only $45 or pay monthly and cancel anytime at $5/month. You can get online right away and build your budget categories. This is the part that actually can help you a lot.
If you only enter housing, food, entertainment, miscellaneous then you are likely going to miss out on a lot of what YNAB was designed to do. I recommend for the first-timers to be more detailed. Break down housing into mortgage, property taxes, HOA dues, rent etc. Break food down into dining out, groceries, coffee, and ETOH.
It’s important to include things that you don’t pay for every month but will have to pay for nevertheless. And that’s why YNAB is brilliant. In Rule Two they talk about budgeting for expenses that you normal don’t budget for but just wait for them to slap you upside your head.
You know you have property taxes coming up, so create a category and you can enter what you goal amount is (about $2k for me) and then maybe contribute $200 to that category. Don’t worry, your money isn’t going anywhere, still sitting in your checking account and losing value while the bank is making money off of you.
Here are my categories, I’m pretty happy with them. I like to get detailed because it allows me to be more aware of how much I’m spending for each category.
Assigning Each Dollar A Job
This concept alone is so fucking brilliant… you’ll know what I mean when you do it. So, you get your paycheck from your medical group or the monthly check from your baby-daddy and those dollars now need a ‘j-o-b’. You know you gotta pay for rent, groceries, dental work, cell phone and your student loan payments. You’ve already created those categories so you start putting dollar values in front of each category.
Here I assigned $400 of my total paycheck to the grocery category. Then as I spend from that category I can either enter it manually or I can just import my bank’s transactions every few days and it will show up as an expense in that category.
Every time you assign an amount to a category that green box on top that says To be Budgeted will decrease accordingly. Right now it says $0 because I assigned every last dollar a task. So if my paycheck was $5,700 and I budgeted some of it to my HOA, property tax, groceries, entertainment etc I would have some left over that I would then budget to my Emergency Fund or my investment account.
This is Rule One and I should mention that YNAB functions off of 4 rules. Let’s jump into Rule Two.
Budgeting For Those Rare Expenses
This would be Rule Two of YNAB. The obvious expenses are some of the ones I already mentioned. But your medical re-certification which costs $2,000 may not be coming up for another 6 months or 18 months. You can budget for this very nicely.
I tried thinking of a few expenses that are infrequent but that we are likely going to have to budget for and often times raid our EF for:
- root canal
- tire changes
- car repair
- moving expenses (even if 1-2 years away)
- real estate taxes
- CME courses
Rolling With the Punching – Adapting To Changing Needs
Here is Rule Three. In my example let’s say that I’ve already budgeted my $5,700 paycheck. I entered the proper amounts for each category and dedicated the rest of the money to my EF and my investing categories. Again, it doesn’t matter if I’ve already sent the money from my checking account to my Vanguard account or anywhere else. We are assigning tasks to dollars… that’s the most important concept.
Let’s say I went on a date with a Shahs-of-Sunset kind of woman… I bought a few cocktails, then went to dinner and then sobered up at a fine cafe with a couple of latte’s. When I get home to my YNAB I will have realized that besides all the gas from the latte’s I’m also left with a deficit. I spent $150 for that night out. I went over by $50. What do I do? The solution is to look at my other Optional budget categories and see where I can pull another $50 from. If I was saving for a vacation then that’s the budget I’ll pull from, or maybe if I was going to buy new climbing shoes in my activities/gym budget then I’ll pull from there.
I obviously won’t pull from my HOA budget because I don’t want to lose my condo. So why all this penny-pinching? Why all this shuffling around? I mean I’m rich bitch! I’m a docta! Yes, I am but… I don’t want to work for the man forever. My money is a tool and if I don’t use it right in the long-run I will lose. $150 here and $50 there adds up to a lot over a career.
The Last Rule
If you are living paycheck to paycheck as a doctor then this rule is for you. The basic concept of Rule Four is that when you get a paycheck in January you have so much money left in your checking account that you could start budgeting for February.
How does this apply to us docs? Having money left over in our checking accounts isn’t all that uncommon, after all, we make a hefty income. The problem is that it will suddenly get drained when you buy that $11,000 dining table or get a new $5,600 transmission for your BMW.
The Logistics of Using YNAB
I know, budgeting sucks. But that’s how you got through medical school… by budgeting your time. In order to do that you pulled time out of socializing, drinking and smoking weed. You still had some time to dedicate to those joyous events but not nearly as much as the friends you grew up with.
Because you budgeted your time you now have a high income that can afford you freedom from a job earlier than your colleagues. You didn’t budget the entire time you were in med school/residency. After a while most of your friends were in your shoes as well and so it became second nature. You would first get your studies out of the way then you would do a little exercise and then you would go socialize and because you didn’t wanna suffer the next day you knew you would be in bed before midnight.
YNAB should be a stepping stone for you. How long do you need to do it for? I needed to do it for 2 years and it worked miracles. I took a 1.5 year hiatus and now I’m finding myself needing to use it again.
If you don’t learn to budget and budget effectively then you will have a much tougher time reaching financial independence. If you don’t budget you may just have to follow the dreaded 80%-rule which means you need to have 80% of your income when you retire. This, of course, is ridiculous!! I don’t need $240,000 a year of income when I retire. Sure, it would be a luxury to have that much income but nothing in life is free. You would need to work your ass off to get to an income of $240k a year in retirement.
How do you budget your income?
Do you know how much you spent in 2014?