Surprisingly, I’ve had a number of requests to do posts on budgeting. I can’t think of a more boring subject to cover. Let’s see if I can offer something unique on the subject. I once posted my budget on an internet forum frequented by students, residents in my specialty, and a few attendings. It was a ridiculously popular thread. In fact, the ensuing discussion was a major factor in my starting this website. Apparently people are so hesitant to talk about money that seeing someone else’s budget is more sensational than peeping in their bedroom windows. That’s probably a bad thing, so let’s see if we can get folks talking about this stuff.
A budget IS a personal thing, since it demonstrates where your priorities are. You might not think of it that way, but if your budget DOESN’T reflect your priorities, it’s time to make a change. For example some people may spend more on clothes, transportation, vacations, or their home. Others might direct a lot of money toward paying down debt or toward retirement. Still others may give a lot to charity. Some may even be embarrassed to reveal they’re spending most of what they make, or even more than they make. No wonder no one wants to talk about this.
It does help if you think the process of budgeting not as a constraining, boring process, but rather as a plan for financial independence. Tons of marriages break up over financial issues. Budgeting done properly can essentially eliminate relationship fights over money.
I think some people were hoping to get some kind of percentage guideline- spend 20% on housing, 5% on transportation, 20% on retirement etc. I don’t think that’s necessarily a great idea, since some items are a fixed cost, and as your income goes up you don’t need to spend more on that category. Plus, a doctor in the Bay Area is simply going to have to spend a higher percentage of income on housing than one in Dayton, Ohio.
Here are a few guidelines to consider when you draw up a budget.
1) The hardest part is getting started
Any budget is better than no budget. If you’ve never done it, just write down for a 2 or 3 months every dime you spend. That’ll show you what your budget is now, whether you know it or not. Then you can decide if you need to make some changes.
2) Minimize fixed expenses
A surprisingly high percentage of budgets are determined a priori without thinking about it. If you buy a million dollar house on a $150K income, guess what? You’re going to have a high percentage of your budget committed to housing costs. Same with buying an expensive car on credit.
The ideal is to have a relatively small percentage of your budget committed to expenses. That gives you maximum flexibility in the event an unexpected expense comes up, or you decide to make a major purchase, or if heaven forbid, you lose your job (or more likely, have a significant drop in your income.)
Consider two doctors, one who puts 20% of his income into retirement and another 10% toward vacations, 529 plans and upcoming car purchases and a doctor who saves only 5% of his income and has the rest committed to car payments, a large mortgage, and college tuition for his two kids at Princeton. Let’s say their incomes both decrease by 15%. This is inconvenient for the first, but a financial catastrophe for the second.
Fixed expenses are often debt payments. The less debt you take on, the lower your fixed expenses. Other fixed expenses include taxes (income, payroll, and property), insurance, and utilities.
3) Save for retirement off the top
Never, ever grow into your income. As an attending, you should never get to the point (at least before retirement) where you are spending your entire income. If you start in residency, or at least shortly thereafter, putting 20% of your income away toward retirement, you’ll never know what you’re missing. Maxing out your retirement accounts will provide you a lifetime of income, a big tax break, and protection of your assets from lawsuits.
I’ll provide a few examples of what I consider reasonable budgets and one example of what I consider an unreasonable budget:
Resident
Income $50K
Fixed Expenses
- Taxes $5K
- Housing $12K
- Utilities $ 3K
- Insurance $2.5K
- Student loan payments $2.5K
- Total $25K
Variable Expenses
- Retirement $5K
- Charity $500
- Auto savings $2K
- Vacation savings $2K
- Food $6K
- Gas $5K
- Everything else $4.5K
- Total $25K
Lessons learned from this budget include the fact that even a resident can save for retirement and give to charity. But a resident, like the average American, needs to watch every penny carefully. There’s less than $400 a month for “everything else.”
Attending # 1
Income $150K
Fixed Expenses
- Taxes $30K
- Housing $24K
- Utilities $ 6K
- Insurance $5K
- Student loan payments $15K
- Total $80K
Variable Expenses
- Retirement $30K
- Charity $7.5K
- Auto savings $6K
- Vacation savings $6K
- College Savings $3K
- Food $12K
- Gas $8K
- Everything else $7.5K
- Total $70K
This doctor is saving not only 20% for retirement, but another 10% toward upcoming future expenses so he doesn’t have to take on debt for them.
Attending # 2
Income $300K
Fixed Expenses
- Taxes $70K
- Housing $36K
- Utilities $ 7K
- Insurance $6K
- Student loan payments $15K
- Total $134K
Variable Expenses
- Retirement $60K
- Charity $30K
- Auto savings $8K
- Vacation savings $10K
- College Savings $15K
- Food $12K
- Gas $8K
- Everything else $23K
- Total $166K
This attending lives only a little bit higher lifestyle than the last one, but by virtue of having twice the income, can afford to save more money and have more uncommitted spending money each month. Notice that his absolute fixed expenses went up quite a bit, especially the taxes on that extra income.
Unreasonable Attending
Income $250K
Fixed Expenses
- Taxes $70K
- Housing $60K
- Utilities $ 7K
- Insurance $6K
- Student loan payments $15K
- Auto payments $12K
- Furniture payments $3K
- Houseboat Timeshare $3K
- Credit card payments $24K
- Total $200K
Variable Expenses
- Retirement $0
- Charity $0
- College Savings $0
- Auto savings $0
- Vacation savings $0K
- Food $6K
- Gas $5K
- Everything else $60K
- Total $71K
There’s a lot to criticize here, as it’s a pretty extreme example. This doctor is spending more than he makes and his fixed expenses account for 80% of his income! This prevents him from putting any money toward the future, as he’s still paying for the past.
One nice thing about being an attending is that you have a high income. If you manage it well, there’s plenty of money to have a great standard of living, pay off all your debts, and save for retirement. But there is usually someone down the street who makes more than you, and there is always someone down the street who spends more than you should. A budget is a plan that helps you avoid blowing the opportunity for financial independence that you’ve earned. Use it.
Also, keep in mind that there are LOTS of reasonable budgets. Just make sure your budget fits YOUR priorities and values. Money is a tool that if used properly can bring you a lot of happiness and do a lot of good.
What do you think? What budgeting tips do you have? What has worked for you and your family?
I tell junior doctors to find an i phone budget app they like. Much ‘sexier’ than writing budget on paper. They then get addicited to it! Iexpenseit I currently use and recommend. Can photograph receipts too.
By the way, as I leave your country…what are the rules for tipping? Seems variable from provider to provider … I got told off that I hadnt provided a tip for my girlfriends nail manicure! I gave 20% in the end! Alot of the Australian doctors here on the course had similar ‘problems’.
It got me thinking that I should only go for meals where gratuities are included. .so that the whole bill ( including the tip) can be given to accountant.
Anyway, other than that, thanks New york for a great time! Even the sex and the city tour was enjoyable!
Great post. I really don’t think your last example of the unreasonable attending is all that extreme. I am surrounded by colleagues with second (and third) homes, boats, timeshares, and various other money pits that I assume were collected over the years in order to impress the neighbors.
During my first few years out in practice, I have learned so much about money management just by observing the bewildering behavior and lack of financial discipline that seems to be so prevalent among doctors.
Although you are correct putting retirement savings into the “variable” category, I think the better way to approach retirement savings during budgeting is to mentally place it in the “fixed” category. Of course, if a catastrophic expense comes up, you could shrink/stop your contribution in the short-term, but if you otherwise view it as a fixed “expense,” you maintain the significant tax savings and future nice lifestyle.
I’m glad you avoided the percentage suggestions… budgeting is too individualized, so long as you make some effort to track spending and are able to accomplish financial goals that you set for yourself.
Good post. Budgeting is always a good idea. I applaud anyone starting to do so. My wife and I did very little budgeting until near the end of my residency but have been pretty strict with keeping a budget.
When I talk with others I recommend the following:
1. Know your monthly income and subtract your know fixed expenses. (Treat retirement and savings as an expense)
2. Have an additional checking account for your “miscellaneous expenses”. This is what I call the “pay yourself” account. My wife and I have all our non-fixed expenses come from this account (food, gas, clothes, entertainment, etc..). If we run out, we eat Ramen until we get paid (I like to avoid that). This allows you to budget without having to track all the little purchases.
3. Always have a savings account for vacations. When your kids are old they will remember the vacations, not that you were able to fund a nice retirement for yourself.
Finally, I applaud being fiscally responsible but also acknowledge that you have onlly one life to live. I have seen far to many people burn the candle at both ends only to die in their late sixties with huge retirement funds. Great for your children, but not the life I am hoping to have. Sure I don’t need a 3000 square foot home, but I want one and I know I will enjoy it. As long as you pick and choose your enjoyments (and not pick them based on others opinions) you should be fine.
Along this line I have to question the 20% retirement savings when you are making the income that most docs make. I am 33. On my “meager” family doctor pay, a 20% retirement fund gaining only 5% for 30 years (I like the idea of retiring at 63) would net me $3.16 million if I was starting with nothing (which I am not). That’s pretty decent, however, use the same numbers at 15% savings is still $2.37 million and I have an extra 5% of my income to enjoy the better years of my life.
I will likely add a greater percentage down the road as pay off more of our current debts.
I agree that saving for retirement is crucial but it isn’t the end all.
Great comments.
Beau- 15% savings is probably enough if you retire in your mid-60s and start in your mid-30s. Unfortunately, most docs start out in a big hole in their mid-30s and don’t start saving for retirement until later. Many docs also would at least like the option to retire early, go part-time, or even stop retirement funding for a few years in order to pay for their kid’s college. Obviously, some docs want a cushier retirement than others too. 15% might be the right number. But 5% certainly isn’t.
20% of $200K is $40K a year. Invested at 5% real, that comes out to $1.39 Million after 20 years, which would provide an income of $55,550 a year. After 30 years, that comes out to $2.79 Million, which provides an income of $111,617 a year. Using the 15% figure ($30K per year), those incomes would be $41,663 after 20 years and $83,713 after 30 years. I’ll let the reader decide if they want to save 15% or 20%, or work for 20 or 30 years. But I hardly think recommending 20% is dramatic overkill since even after 30 years it would only replace 55% of your pre-retirement income. You can always cut back later if you find your nest egg is just too big!
I do like the vacation budget. We’ve used that with great success to take guilt-free vacations.
By the way, who are all these people you know dying with huge retirement funds? According to a recent survey the Fed put out, the average American in his 60s has a net worth of less than $200K, and that includes the house.
Great post and comments!
I am actually teased by my friends about how rigorously I budget. I work at it every weekend, or at least at the end of every month. I use a combination strategy of 1) savings buckets for large intermittent purchases and 2) a debit card for all of our routine monthly expenses. The debit card allows me to track every cent I spend on expenses and therefore follow a budget. By the way, I agree with the 20% savings for retirement and I treat it as an expense that comes off the top…why pay someone else before I pay myself?! Furthermore, if you can do it, it’s not a bad idea to save for retirement beyond just defined benefit plans. It’s nice to have budgeted well enough to have money left over at the end of the month. This money can be spent without guilt. The flip side is that just because you may have something left over, you don’t have to blow it. You can use the extra to shore up a base layer in the long term savings buckets. Make sure that as much as possible, every dollar in every bucket is working for you by gaining interest or appreciating.
Moneydance is an excellent program for tracking your spending including budgeting, investments, loans, net worth, etc. It is much easier to use than Quicken and will work well on a Mac or PC. You can gain MUCH more knowledge when you know your exact net worth when you enter into a conversation or read an article about financial issues.
Keep in mind that budgeting cannot be done alone. This absolutely must be done with the involvement of your spouse if you have one. If you or your spouse hate to budget, try reading or listening to the book, Smart Couples Finish Rich by David Bach TOGETHER while in a low stress environment like vacation. It’s actually quite fun how it will get you talking about priorities, feelings, and your relationship with money. It will also get you started on forming a budget. Another book that can be inspiring for couples looking to plan for retirement is a book called The Number by Lee Eisenberg. It will help you to explore the question of how much is enough.
Lastly, I strongly advocate saving for vacations. And, I recommend talking good ones. Really good ones. One of the keys to happiness is anticipation. Plan great vacations 6 months to a year ahead of time and have them paid for now. At the time of the vacation it will almost feel free and the issues of money won’t clutter your vacation. I will allow to work harder and avoid burnout. At the same time, you won’t miss the enjoyment of the journey TOWARD retirement, only to retire an wish you had more fun along the way.
I was surprised when I read one of William Bernstein’s book, I think it was the Investor’s Manifesto, and he was rather anti-budget. He said that a budget was like a diet, counting pennies like counting calories, and eventually people get tired of it, break it, and then get depressed and give up entirely. His suggestion was to just withhold your retirement from your paycheck (so you cannot spend it), pay your bills first, and then spend whatever is left on whatever the heck you want. Unfortunately due to credit cards I think the vast majority of people are unable to do this without spending more than they make, just like the vast majority of our population is unable to burn more calories than they consume. In any case, I think the real blessing of being a physician, if you have your financial house in order, is that you don’t have to itemize every penny like you would if you were earning an average income.
I agree that so long as you are saving an adequate amount, you don’t need any specific “budget.” In fact, ours gets more and more vague all the time as we have just one big category- “variable expenses” that covers everything from vacations to car repairs to gasoline to food to kid’s clothing.
As a true and motivated beginner to all this, I appreciate this site. Was introduced to it by another attending friend who swears by it. Two questions, though:
1) Why, under the budget for the $150K/year attending, is retirement listed under both fixed and variable expenses? If you remove it from Fixed, your math works out. Or did I miss something?
2) For a $150K income, $30K in taxes is 20%. Yet, according to tax brackets published here, the absolute minimum tax rate for that level of income is 28%. How are you only dropping 20% in taxes?
Thanks for any response; I hope the questions aren’t too elementary, as I still obviously have much reading to do on this topic.
The first question is easy. I screwed up. Thanks for the heads-up, it’s fixed now.
Question two is also easy, but very important to understand. Marginal tax rates are not effective tax rates. You have to “fill-up” the lower brackets before your earnings start getting taxed at your marginal rate. For example, a married person making $150K may have a taxable income of $100K after deductions and exemptions, putting him solidly in the 25% bracket. But what’s his effective tax rate? $17850 at 10% = $1,785 + $54,650 at 15% = $8198 + $27,500 at 25% = $6875 for a total tax bill of $16,858, which is 17% of this person’s taxable income or 11% of their gross income.
Ah, I get it. I actually can’t believe I got to this point in my life without knowing that that’s how that worked. Appreciate the explanation. A final question, then, if you don’t mind: The 30K (20%) you have earmarked for taxes for Attending 1…I assume that’s meant to include ALL taxes taken from the taxable income, e.g. federal, state, local, etc, correct? Seems like so many of my white-coat friends use a flat 55% rule when recommending tips on budgeting (“Assume you’re giving up 55% of your salary before you even see any money, then start your budget”). That seems ridiculously high. Thanks again.
Yup, you’ve got it. Frankly, $30K in taxes is pretty high for someone with only a $150K income. But if they’re single and don’t have many deductions or are in a high tax state, they could be paying that much or even a little more. But 55% of their income ($75-80K)…no.