[Editor's Note: This is a guest post written by Jason Cabler. Jason is a Dentist, Christian personal finance blogger, speaker, and owner of Celebrating Financial Freedom. He teaches people how to become debt free and live a debt free life through his blog, book, and Celebrating Financial Freedom self study course. We have no financial relationship.]
I met The White Coat Investor recently at FinCon 13 (The Financial Bloggers Conference). One of the subjects that came up as we were getting to know each other was the question of why aren’t doctors, dentists, and other white coat professionals any better than the average Joe at handling their money? Who knows, we may be worse! As highly paid professionals there is typically more room for error financially, so it can be much easier to ignore the basics that make for a sound financial situation.
Making a Budget Is Like Documenting a Patient’s Chart
Dr. Jason Cabler
One of the financial basics that tends to be ignored the most is the act of doing a family budget. No, I’m not talking about that general idea in your head about how much you spend every month on certain items. I’m also not talking about the list of bills you pay every month. These are not budgets. A budget is a detailed plan for directing how your money will be used.
As professionals, it’s our duty to document everything we know about our patients. It helps us to treat them to the best of our ability, as well as keeping us out of trouble if the documentation is done well. If we handle our charts the same way we tend to handle our budgets, we’d be in trouble very quickly!
A Budget Will Save You A TON of Money
The point is to document your income and outgo much the same as you would document things in your professional life. This means you should be putting together a monthly zero based budget for your money. Not an idea, not a short list, but a detailed budget that spends every dollar on paper before it’s spent in reality. Why do you need to do that? Because it’s too easy to spend more than you make without realizing it’s happening. Most Americans, including us white coat types, spend more than we make because we don’t take the simple step of keeping close track of our money. It’s not that hard, but when you make it a habit, it will literally save you tens to hundreds of thousands of dollars over your lifetime!
Establish a Simple Habit First
I believe the best way to get started with budgeting is to first establish the habit of writing everything down for 30 days. Every time you spend any money, document it. Write it down in a small notebook you carry in your pocket, or in the note taking app in your phone or tablet. Once you’ve done that for 30 days you’ll have enough information to take the next step- filling out a monthly budget. You can do that using these downloadable forms.
I prefer to write my budget out on paper, but if you prefer, you can set it up on your computer in an excel spreadsheet or use any number of budgeting apps, software, or websites that will allow you to put together a zero based budget. All you have to do is fill out the forms and make sure that income minus outgo equals zero. It’s really that easy… sort of. It might be a little hard at first to tweak things and get everything to fit, because you might need to cut back in some areas.
You Won’t Get Your Budget Perfect The First Time
We docs tend to be perfectionists, so I’ll warn you now- you may not get it perfect the first few times you do it. That’s OK, it’s not the MCAT, it’s just a budget. Once you get used to doing it, it gets much easier and becomes automatic.
[Editor's Note: Budgeting resources from Jason include his budgeting forms, these posts on his website:
- How Do I Start a Budget?
- How Do I Start a Budget? (Round 2)
- How Do You Budget On A Variable Income?
- Why Your Budget Doesn’t Work
and his book, How to Budget- The Quick and Easy Guide to Making a Budget That Works. It's only 99 cents, but if you buy it through this link, I get 6 pennies. Feel free to do your Christmas shopping while you're there.]
What do you think? Do you budget? How did you design yours? Do you use a zero-based budget? Do you think highly-paid professionals need a budget? Comment below!
I believe in a less restrictive budget because I don’t have the time to devote to it that some people do. My wife and I operate our financial life out of five accounts and one excel sheet that tracks all reoccurring debts/bills.
Our Accounts:
Emergency Savings – 6% of paycheck
Vacation Savings – 4% of paycheck
The Next Thing Savings – 2% of paycheck, usually saved for big ticket items (furniture etc)
Daily Checking – 25-30% of paycheck
Master Checking – Remainder of paycheck, all bills come out of this account
At the start of the next pay period any remainder 90% of any remainder in the Master Checking is moved into one of the other savings accounts. We probably put more in savings then the average doctor but we are trying to build our emergency fund up.
I know every dollar/expected bill moving in/out of all accounts except our Daily Checking. It just has to many small transactions. That account we use to pay for everything else: clothing, food, gas, entertainment, doctors bills etc…. I find it easier to keep a running account total in my head for that account rather than budget small charges.
It does have a curious effect though in that even though I make good money we are often “nearly broke” in our Daily Checking (spending) account at the end of pay period. I do feel that helps us rein in costs though. It makes us constantly ask on none pay weeks “Do we NEED this or do we WANT this?”
Just an idea..
Sounds like you have a system that works well for you. The fact that you’re putting a lot of money in savings, yet still feel “broke” is good. It means you’re paying attention and not just buying anything and everything you want.
That just sounds tedious and exhausting! I know that many physicians struggle to spend less than they make, but I also think there are many of us (especially those who read blogs like this one) who can do just fine with a less restrictive approach like Beau outlined.
My wife and I approach our finance from a savings first perspective. Our contributions to IRAs, 401k, 529, HSA, taxable accounts and additional mortgage principal are all automated and account for 40% or our annual gross income. We feel this savings rate should be more than sufficient and as long as we are able to sustain it then we know we are doing well. If we ever have to lower a contribution, we find out what went wrong and address it. Nearly all our bills go to credit cards that are paid automatically from our checking. We always keep a minimum of $5k in our checking to serve as a kind of “mini emergency fund.” If our balance drops below that it causes us to look at our spending for the month and determine if we truly spent more than we should have or if the expenses were necessary. Anything over $5k is either set aside in a different account for an upcoming major purchase, or more often transferred to an investment account. Within those parameters, we feel able to spend freely.
There is definitely value for many in keeping a budget like the one described. However, I think that if you are receiving a typical physician salary and find yourself struggling to fit household cleaning supplies and toiletries into your budget than you have much bigger problems going on. Most likely those problems involve big ticket items and lifestyle inflation, not exceeding your monthly toothpaste allowance.
That sounds like our budgeting process. We track spending, but don’t do anything throughout the month to limit it. But I’ve got 14 years of monthly budgets saved on this computer somewhere. I could literally tell you where every dollar has gone over that time period. Maybe we’ll quit doing that sometime since it seems kind of pointless now. That monthly exercise, however, has at least given us the opportunity to discuss financial stuff at least once a month and made us rich. So it was time well spent, even if it hasn’t been particularly necessary the last few years.
I do think it’s a good exercise to do every month because it forces you to communicate with your spouse and know where all the money is going. It’s not about how much you spend on toothpaste as it is being aware of your financial situation, and making sure that you are saving and using your money as efficiently as possible.
A great idea for anyone with either a spending problem or someone with a narrow gap between income and fixed expenses (which should ideally not be a problem for any doctor).
At the other end of the spectrum, physicians who are able to consistently live comfortably on 25% of their gross income probably don’t need any kind of written budget.
You’d be surprised how many high income earners such as doctors live on more than they make. These are the people that need a budget the most. Certainly if you’re living comfortably on 25% of income, a budget is not as important.
I agree. Most of my colleagues have spending problems and constantly complain about not making enough money. It’s sad.
Being retired I have a yearly budget and a monthly one for each month as well. It is not as detailed as some might want but all the major costs have separate line items. Then there is an amount that I can spend on whatever I want or save a little for later. This works for us since we don’t have any debt, and the budget in total for the year is way less than our taxable income.
Having a plan to direct your funds is what is important, having all the large amounts (including savings for various things) is a must, detail level is an option in my opinion.
I agree, no matter how much you have or how much you make, you must have a plan.
I use a very strict budget by having my normal everyday accounts and my savings account. My savings account is budgeted into categories so at the beginning of the month when I’m paid I move over X amount which then gets allocated to another budget. This way I ALWAYS know what my savings account amount is what its for (including a budget for christmas)-this keeps the temptation to spend what I don’t have to a minimum.
Mint.com has transformed my life and budgeting. Its a free service and since I only carry a credit card (which I pay off every month) it makes it SO EASY to set up a budget that I can actually follow. I would highly recommend it.
Yes, we use mint too. It is great with lots of nice features.
I’ve also heard Mint.com is good. Haven’t tried it yet though.
I strongly agree with the budgeting concept. I would also say that the more formalized the budget is, the more helpful it can be in finding problems with overspending and maximizing the work of every dollar.
Thanks for the Mint.com suggestion. I have used Quicken and currently use Moneydance. Each has it’s pros and cons (Moneydance is very detailed but somewhat complicated). Moneydance is particularly good at tracking net worth and its user are anxiously awaiting an envelope budgeting feature that has been promised. Does anyone else have suggestions on what they feel is the best budgeting software for physicians like us? Something that can handle numerous accounts, numerous monthly transactions, budgeting, investments, loans, reporting, and net worth (without needing an accounting degree to use it)?
I haven’t used it, but I’ve heard good things about “You Need A Budget” and know the owner personally. You might try it.
I created an Excel spreadsheet that keeps track of all expenses.
For networth I have a seperate spreadsheet that I update every so often.
Budgets are a great idea. Living a “debt free life” can also be appropriate for many people. If you use debt to accumulate liabilities, then debt can be a problem. However, many of us used debt to garner a professional degree which lead to a high income. If you calculated your ROI from the debt of medical school, many would say they came out far ahead. The same can be said for some who take on debt to purchase real estate. This leverage can accelerate wealth accumulation for those who know what they are doing.
Absolutely, there are losers in this space. However, those are more often than not people who took out debt without first knowing what they were doing. Wise debt requires knowledge, commitment, and discipline. I’m sure there are many people out there paying off medical school, dental school, etc. who never finished and didn’t get their degree. Those individuals could easily say that it is not wise to take on debt for professional school. For them and for people like them, they are right. However, they are not right for everyone.
There’s no doubt that leverage works, that it works both ways, and that debt allows us to do some things we would never be able to do without it, such as purchase a house or an expensive education.
Ynab ‘you need a budget’ was an eye opener for me. It’s not just for penny pinchers but really for anyone who wants to see where all there money is going. We are a dual MD family with three kids and are finances aren’t ridiculously complicated but we live in one of the most high cost cities in the country. It’s not about daily coffee but budgeting for travel, savings (401, IRAs, 529), student loans, mortgages, insurance, etc etc etc. I used Microsoft money in the past then mint, but YNAB is a keeper. It’s prospective versus the rest is retrospective. For those starting out and wanting to plan their spending who are not already on autopilot check it out.