Imagine a life without payments. No student loan payments. No credit card payments. No car payment. No mortgage payment. Maybe not even a life insurance or disability insurance payment. How would that affect your budget? What would it look like?
Regular readers will recall we paid off our mortgage a few years ago. Most doctors agonize over the “pay off debt versus invest” issue. We no longer do. While we're relatively frugal, we're not absolutely frugal. Not since we loosened the purse strings. Although we only spend a small percentage of our income, we still spend gobs of money by any but the most ridiculous standards. We're not going to address the income side of our budget today, nor the largest outflows, which are investments, taxes, and charity, in that order. Today we're just going to discuss our spending, and what that looks like without payments. Because to us it looks pretty awesome and helps to explain what I mean by “the good life” that is available if you “take care of business” early in your career.
The WCI Family Budget
Utilities: $400 per month
This includes gas, electric, cable, internet, phone, water, wastewater, and garbage services. That's actually a really good month for us. It can often be a couple of hundred bucks higher in the summer (A/C) or winter (heating.) It is also less than many docs spend because the lion's share of the internet and phone bills run through the business.
Insurance: $1,800 per month
Most of this (almost $1200) is health and dental insurance. I always laugh when I hear people complain about the $200 their employer is taking out of their paycheck for their health insurance. Go buy it on the open market without a subsidy and you'll realize that $1200 isn't exactly a Cadillac plan, especially if you're over 50. This category also includes life, disability, liability, and property insurance.
Trips and Travel: $2,500 a month
You may have noticed that we like to go on trips. This portion of our budget acknowledges that we spend a lot on it. While we don't spend $2,500 on travel in most months, this is really a “sinking fund” for when we spend a lot more than that. We mostly only reach into this sinking fund when we are doing something more expensive than a simple road trip for a few days.
Short Term Savings: $2,500 a month
Feeling squeezed by payments? Get rid of them!
New vehicles, boats, and expensive repairs and home upgrades come out of this sinking fund. This fund allows us to pay cash for these items.
Living Expenses: $5,000 a month
Everything else comes out of this fund. That includes groceries, gasoline, restaurants, road trips, family activities, kids' clothing, kids' activities, medical costs, and anything else you can think of. Whatever is leftover at the end of any given month goes into our “allowances” (the money we spend on whatever we like without having to account to our partner — generally our own activities, clothes, and toys.) If we overspend the $5K (as we do occasionally) the difference comes out of our allowances. But where the money in this fund actually goes in any given month is highly variable. In February we spent $4,318. $526 on gas, $1477 on groceries, and $628 at restaurants. Apparently, nobody is starving in this family and yes, that grocery bill is a little higher than usual, but the pantry is pretty full right now.
Property Taxes: $300 a month
Again, this goes into a sinking fund and gets paid once a year, just like life and disability insurance.
Total: $12,500 a month ($150K a year)
5 Things to Learn From Our Budget
There are a few things that can be gleaned from a quick perusal of this budget.
1. No Interest
As my daughter taught you so eloquently a few months ago, interest is something you receive, not pay. Look at all the amazing things you can do on a doctor's salary if you don't have to make any payments. No mortgage payment. No student loan payment. No car payment. It's a nice way to live. Interest in our life is always a positive number.
2. 80% Variable
80% of our spending is what I call variable spending, i.e. money that doesn't have to be spent in any given month. What actually has to be paid in any given month? Well, the utilities and the insurance. The sinking funds ($2500 to travel and $2500 to large expenses) don't HAVE to be funded. In fact, those funds can be sources to fall back on for basic expenses in the event of an income shortfall.
The living expenses can also be dramatically reduced. Obviously, everything you cut there has a direct impact on your lifestyle, but when a family of six is spending $2K on food, there's a lot of room for belt-tightening, especially when the pantry is full. The point is that if we had to, this $12,500 could be cut back to $5,000 very rapidly. That's the benefit of limiting your fixed expenses.
3. A Lot of Fat
Without a doubt, there is a lot of fat in this budget. We have designed it purposely that way. If your budget feels tight or restrictive, you might try making some changes in your financial life that will get rid of that for you. That might mean earning a little more money. It might mean saving a little less for retirement (perhaps just 20% instead of 25 or 30%.) It might mean getting rid of some of your payments by paying debts off. It might mean living in a less expensive house, driving less expensive vehicles, or moving to a lower cost of living area. Get some fat into your budget and you'll find it a lot easier to stick with.
4. Zero Financial Worries
Does this budget look like it comes from a couple who fights over money? Do we worry about our house being foreclosed on? Nope. Do we worry about making those student loan payments? No, sir. Do we worry about putting food on the table? Not with a full pantry. Do we worry about an emergency popping up that we couldn't cover? It would have to be quite an emergency for us to even get to our emergency fund given the amount of fat in this budget. What do we have to worry about; whether we're going to go to Paris or Bhutan? Whether we buy a new SUV or upgrade the kitchen this year? Those worries don't even qualify as first world problems. We don't have to choose between braces and piano lessons; we can do both!
5. A Lot of Fun
Most importantly, this budget to us represents “the good life.” In my book, I defined that as
“a life free from financial worries, a career where you make a real contribution to society, a few luxuries along the way, the ability to help others financially throughout your life, and a comfortable retirement at a time of your choosing.”
Although one can never discount the value of some good fortune, we mostly arrived at this point by making smart financial decisions throughout our life- we chose to go to inexpensive schools and work our way through them. We maximized our income whenever the possibility presented itself. We “lived like a resident” for four years after residency. We paid cash for cars, boats, vacations, and everything else (other than a house, which we paid off in just over 6 years.) We elected not to live in Manhattan, D.C., or The Bay Area.
Did we make some sacrifices along the way? Sure. But here we are at mid-career with $30K a year to blow on trips. You can have an awful lot of fun for $30K. $10K was two weeks of reckless spending in France. A week in Belize bought at the last minute was only half that. A week of Canadian heli-skiing costs even less. $30K a year for short-term expenses adds up to two $60K cars, a $90K boat, and a $90K home improvement project every decade. You've got to have pretty expensive tastes for that to not be “enough” for you.
The Naysayers
The only thing keeping most of them from achieving it is the fact that they spent money before they had it, i.e. they have payments. Do what it takes to get rid of your payments early in life and you'll be amazed how quickly you find yourself living the good life. Lots of doctors make $300K by themselves. They can put 30% toward taxes, 20% toward retirement, and still have a budget with this much fat in it.
The only difference between this budget and that of most doctors is the absence of payments. Get rid of your payments! Your 45-year-old self will be eternally grateful to your 35-year-old self! You don't have to have student loans! You don't have to have a mortgage! You don't have to have a car payment! You can “be done” saving for college or even retirement! Get rid of your payments!
What do you think? What would your budget look like without payments? What changes in your life would you have to make to be rid of your payments? Comment below!
WCI, I’m working on my own budget and wondering how I should account for my big quarterly tax payments. Do you have quarterlies? If so, how do you put those into a budget? Also, if you’re planning for a major purchase (new car, home remodel) where do you allow for that?
Yes. This might make a good blog post about the taxes. But basically a year ago I paid 31% of my income in taxes. So this last year I put 32% of everything I made into savings account/MMF and use it to make tax payments. I then take my tax bill from the year before, multiply it by 110%, divide it by four and pay that each quarter. That keeps me in the safe harbor. The rest I pay in April. State taxes are also due in April. But the money I use to pay those bills is set aside in the savings account/MMF. It got a little weird this year with our new S Corp status (so we had to send in some taxes we withheld from ourselves) and we paid the state taxes in December instead of April due to the tax law change, but we’re basically doing the same thing and plan to keep doing it this way. If I end up paying 34% of my income in taxes for 2017, I’ll withhold that % into my savings account this year. Haven’t done my 2017 taxes yet, so not sure what my % will be.
As far as the other stuff, we are currently saving $2500 a month toward vacations and $2500 a month toward “major purchases” like new cars and home remodels. It all ends up in the same savings account as our e-fund and taxes, but we keep track of what’s what on a spreadsheet.
Where do you categorize your charity?
It has its own category. It’s above and beyond everything listed in this post. Just like retirement savings and taxes. Actually, all three of those dwarf everything else in the budget.
I keep returning to this budget post every now and then.
Awesome post!