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Last winter, my husband, Brandon, and I began researching travel expenses for a trip to see family in Nevada. I’m not a physician myself, but my husband is; he had been out of training and working as a PM&R attending for about six months at that point. My cousin and his family live near Las Vegas and we try to get out there at least once a year. It’s always a great time—my cousin’s young kids are so much fun and the sunshine is certainly a bonus coming from our home in southeast Michigan.
When we were planning this trip, we realized flight costs had increased as the travel industry anticipated the impacts of the newly available COVID vaccine. Tickets were pretty expensive, nearly $1,000 dollars each. Our conversation paused at this point and we wondered—is this trip something that we could afford?
Since we didn’t have a true budget to look at, we really had no idea. And that was a big problem.
Beyond Our Financial Plan
Like many followers of The White Coat Investor, my husband and I use our financial plan to guide many of our life and career decisions. But we realized we had some questions about our spending that fell outside of that plan. How do we know what we can afford to spend on rent or a mortgage each month? How much we can spend on groceries each week? Do we know if a vacation is feasible for our family this year? These things aren’t necessarily spelled out in our financial plan, but to keep that plan on track, we’ve benefited from developing a budget and tracking our expenses.
We first turned a close eye to our short-term household expenses during the final year of Brandon’s residency. We spent a lot of time evaluating our finances as we prepared for a year-long out-of-state fellowship that he would soon be completing. I would be staying at home in Michigan, and we needed to know that we could make things work financially. We survived that fellowship year, and Brandon returned home to a new baby and the start of his first attending job. We adjusted to the increased income and relaxed our spending limits a bit. Throughout this, though, we continued to prioritize paying off his student loans. Our goal: minimize our discretionary spending as much as possible and send every extra dollar to student loans.
This approach soon led to some unnecessary financial stress—could we afford to take our annual trip to Nevada? With the way we were running our finances, the answer to this question was a qualified “yes, but only if we send less to student loans this month.” Framing expenses in this way left us feeling guilty about our spending choices, and we realized that this method of student loan payoff wasn’t a good fit for us.
We were pinching pennies across all of our spending, and we had diminished our quality of life below what we wanted. And, after running the numbers, we discovered that our inconsistent student loan payments weren’t making much of a dent in the total balance anyway. We could send a few thousand extra one month; in the following month, when our car insurance was due, for example, we couldn’t send much at all. Our interest rate was pretty low at this point, and for all of the stress about our spending, we weren’t making a meaningful impact on the total balance of the loans.
Getting Started with Budgeting
We’d been pretty in the weeds with our finances over the past few years and thought that we had been budgeting. But actually, we’d just been tracking our expenses after the fact. At the end of each month, we’d add up everything and would hope we’d have some money left over for an extra student loan payment. That’s not how a budget works.
We realized we needed to make a plan for our monthly spending. We identified a specific amount for student loans each month and, at the same time, accounted for our general wants and upcoming planned expenses. Reframing our day-to-day financial management in this way eliminated some of the guilt we were feeling about how we chose to spend our money.
To get started with this, we had to figure out a few numbers:
- Money available for spending each month
- Average expenses for the past few months
Inflow: Money Available for Spending
We had automated many elements of our financial plan, including retirement contributions. Since we monitor those investment accounts closely as part of our financial plan and since we were new to this level of budgeting, we considered focusing on just the cash coming in. This would have been pretty simple—just review the direct deposit amounts sent to our bank accounts each payday.
There are several other automated payroll deductions that come out of my check, though, including contributions to our HSA and FSA. We utilize the HSA for significant healthcare expenses and submit our daycare expenses for reimbursement from the FSA each month. Considering this, we decided to review our paystubs a little more closely to keep track of these other available funds.
Outflow: Where’s the Money Going?
To determine how our spending matched up with our income, we reviewed our monthly expenses to get an idea of our average spending and began to categorize our expenses. This created an outline of our budget. We studied some example budgets that we found online but realized it was important to personalize the categories to our situation and needs. Once the information was clearly laid out, we could better see where our money was going and then plan where we wanted it to go in the future.
Looking Back at Our Financial Plan
We took some time to critically review our expenses and reflect on this spending data. First, we totaled things up. Did our typical monthly expenses add up to more than our income? In some months, yes. After an initial panic, we noticed these were the months in which we’d had to pay a few large bills. Looking longer-term, our typical expenses averaged out to a few hundred dollars below our expected monthly income. Our retirement savings were automated and we had already accounted for other savings goals, so we could feel confident that we were spending within our means.
Knowing that, we looked back at our financial plan to confirm that we were on track with all of the goals we listed there. We set a target for the minimum amount we’d like to send to student loans each month and allocated the remaining extra funds to intentional savings goals for travel, home improvements, and upcoming planned expenses.
Budgeting: Planning How We Will Spend Our Money
We used our expense categories to plan ahead for a month or two of spending. Of course, just a few months into this new budget, a family emergency increased our spending needs. To account for this, we reduced our discretionary spending a bit over the next few months to replenish our emergency fund. As long as our expenses weren’t exceeding our income and we were staying aligned to our overarching financial goals, we figured we were free to move money between categories as often as needed. We were realizing that our budget—unlike our written financial plan—should be a flexible document
We also set up sinking funds for our irregular expenses, recognizing that these costs were often throwing our monthly cash flow out of balance. Sinking funds are intentional savings to be used for planned, infrequent expenses. For us, these expenses may be regular ($1,200 every six months for auto insurance) or irregular (a $3,000 family trip). In either case, it’s money that will need to be spent at a future date.
We’ve honed the categories over the past year, and we are currently assigning funds to each of the following:
- Student loan minimum payment
- Student loan extra payment
- Housing (mortgage and homeowner’s insurance)
- Utilities and bills (gas, electric, water, internet, cell phone, home security, streaming services, etc.)
- Transportation (car payments, gas, parking, registration/tabs, etc.)
- Life and disability insurance
Variable and Discretionary Spending
- Groceries and household expenses
- Dining out
- Personal care
- Child-related expenses
- Pet care
- Fun money
Sinking Funds for Irregular Expenses
- Home maintenance
- Medical, dental, vision (co-pays, deductibles, etc.)
- Auto insurance
- Umbrella insurance
- Holidays and gifts
- Charitable giving
- Emergency fund contribution
- 529 contribution
By adhering to this budget, we have increased our net worth by 73% percent this year. We’re still on the negative side, but we have made dramatic progress toward our financial goals and just feel a lot better about how we’re spending our money.
Our financial plan and budget are helping us ensure that our money is used to create a life in which we can prioritize what matters most to us—which it turns out, includes continuing to take our annual trip out west.
Which came first for you—the financial plan or the budget? Did budgeting help you increase your net worth as dramatically as Alaina? Comment below!