By Dr. Jim Dahle, WCI Founder
For years, I've had several requests to do posts on budgeting. I can't think of a more boring subject to cover, so 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 me 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. (If you're interested in reading more about the subject, here's a look at my 2017 budget.)
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 helps if you don't think of the process of budgeting 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.
Guidelines for a Physician Budget
#1 The Hardest Part Is Getting Started
Any budget is better than no budget. If you've never done it, just write down every dime you spend for two or three months. 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.
More information here:
Real Life Examples of Physician Budgets – From the Frugal to the Extravagant
#2 Minimize Fixed Expenses
A surprisingly high percentage of budgets are determined without thinking about it. If you buy a $1 million house on a $150,000 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 idea is to have a relatively small percentage of your budget committed to fixed expenses. That gives you maximum flexibility in the event an unexpected expense comes up; 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 puts 20% of their income into retirement and 10% each toward vacations, 529 plans, and upcoming car purchases. The other doctor saves only 5% of their 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 it's 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 with 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.
More information here:
Budget Examples
Reasonable Budget for a Resident
Income $60,000
Fixed Expenses
- Taxes $6,000
- Housing $14,400
- Utilities $3,600
- Insurance $3,000
- Student loan payments $3,000
- Total $30,000
Variable Expenses
- Retirement $6,000
- Charity $600
- Auto savings $2,400
- Vacation savings $2,400
- Food $7,200
- Gas $6,000
- Everything else $5,400
- Total $30,000
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. In this budget, there's less than $500 a month for “everything else.”
Excellent Budget for an Attending
Income $160,000
Fixed Expenses
- Taxes $30,000
- Housing $24,000
- Utilities $6,000
- Insurance $5,000
- Student loan payments $15,000
- Total $80,000
Variable Expenses
- Retirement $32,000
- Charity $6,500
- Auto savings $5,000
- Vacation savings $6,000
- College savings $3,000
- Food $12,000
- Gas $8,000
- Everything else $7,500
- Total $80,000
This doctor is saving 20% for retirement and close to another 10% toward upcoming future expenses so they don't have to take on debt for them.
Another Good Budget for an Attending
Income $300,000
Fixed Expenses
- Taxes $70,000
- Housing $36,000
- Utilities $7,000
- Insurance $6,000
- Student loan payments $15,000
- Total $134,000
Variable Expenses
- Retirement $60,000
- Charity $30,000
- Auto savings $8,000
- Vacation savings $10,000
- College savings $15,000
- Food $12,000
- Gas $8,000
- Everything else $23,000
- Total $166,000
This attending lives only a little bit higher lifestyle than the last one, but by virtue of having twice the income, they can afford to save more money and have more uncommitted spending money each month. Notice that their absolute fixed expenses went up quite a bit—especially the taxes on that extra income.
Unreasonable Attending Budget
Income $250,000
Fixed Expenses
- Taxes $70,000
- Housing $60,000
- Utilities $7,000
- Insurance $6,000
- Student loan payments $15,000
- Auto payments $12,000
- Furniture payments $3,000
- Houseboat timeshare $3,000
- Credit card payments $24,000
- Total $200,000
Variable Expenses
- Retirement $0
- Charity $0
- College Savings $0
- Auto savings $0
- Vacation savings $0
- Food $6,000
- Gas $5,000
- Everything else $60,000
- Total $71,000
This is a pretty extreme example, and there's a lot to criticize here. But it's not uncommon. This doctor is spending more than they make, and their fixed expenses account for 80% of their income! This prevents them from putting any money toward the future since they're 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?
[This updated post was originally published in 2020.]
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.
That’s a good word, “assume” you can’t be sure about their finances because they “seem” to have 3 homes and a boat.
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.
Agree.
From day one out of residency, 401k and personal savings have been a non-negotiable fixed bill that I have paid myself for the last 12 years. Did not buy a darn thing (including new car) until my loans were gone. Put off kids, too.
12 years later, that’s a fat bank account (like retire today if I want), paid-off house, fully funded 529s.
Imagine being 40 years old with a physician’s salary that you get to spend on whatever you want bc you ain’t got no bills outside of taxes and insurance, brother.
I call that “living the dream” or “living the good life.” It’s pretty nice isn’t it?
It is, but I keep the same level of savings, work less, and have more fun time with my kids.
🙂
Thanks for your writings!!!
I really impressed that you are making your happy future life!!!
Very helpful for me.
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.
I think I understand the difference between effective and marginal tax rate annually but am wondering how it is applied throughout the year with each paycheck.
Are you taxed at the effective tax rate throughout the year so that the same federal tax is is deducted from each paycheck? Or does it increase throughout the year as you accumulate more total annual income and “fill up” the lower brackets? Would the person above be charged equally each month at ($16,858/12)? Or instead would the first month of the year be lower as they fill up the 10% tax bracket compared to the end of the year when they are filling the 25% bracket?
Funny you should ask. I had to learn how to do this. There are IRS tables that tell the employer how much to take out of each check. They’re based on that check amount, not on previous amounts paid in the year. So equally each month if you’re paid equally each month. The SS taxes do drop off after the first $130K or so though.
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.
Thank you for your helpful post. I’ll be finishing residency in June and, in anticipation of the desire to spend all of my attending salary on shopping and vacations, I want to focus on creating a sound and reasonable budget.
In the budgets you posted above, 20% of income should go to retirement. Max contribution to 401K and IRAs (to then Roth IRAs) are 18K and 5.5K, respectively. 23.5K total. For an attending making 150K, 23.5K would not equal 20%. 6.5K more would be needed. Where do you recommend the 6.5K go? Is that when people contribute to health savings accounts or directly into mutual funds, for example?
A taxable account is the usual place. So yes, buy mutual funds “directly” in a typical non-qualified or taxable account.
Also should look into elective deferral plans to hit the max at $55k.
Not clear what you’re referring to. 401(k)s/Profit sharing plans and SEP-IRAs have a 2017 max of $54K. Is that what you’re referring to? This particular doc was maxing out his 401(k) already per the comment.
Sorry, yes. $54k.
Your employer may be able to treat some of your compensation as a ‘match’ to add to the $18k to get you to the $54k.
Yes, it is very important to become an expert on the retirement plans available to you.
For those younger readers, I’m wishing at this point that we had used a budget. I’m 58 and have quite a bit saved (~2.9M), but have not been as attentive to saving as perhaps I should have been. I have at least 5 more years of full time work (good income ~$500K) and probably part time at least until Medicare kicks in. A lot of money has gone to school tuitions for 2 kids – the oldest is a med student (I bought your book for her) and the youngest a senior in high school, so they will be on the payroll for awhile.
Advice for these last 5-8 years before retirement?
Sounds like you did “good enough.” A physician income can cover a plethora of financial mistakes. Your nest egg is likely to double in the next 5-8 years, which should provide a retirement income of >$200K.
Double? Really? With making maximum contributions and the market? What I’ve done since listening to your book is to gather expenditures for the last year to try to figure out what we we need in retirement. I think that’s the hardest to figure out. A lot of unknowns.
We’ve been using the same financial guy since I was a resident. Personally I really like him, but I have no idea how much he makes from us. He started as a flat fee but now he’s “free”. Which means the fee is built in somewhere.
I’ve been looking for something to read for “the last 5 years before retirement”. Suggestions? I’m also considering an alternative investment like real estate.
You are right though – I have always felt fortunate to be in a profession that is well compensated and it helps that I really like what I do. I was raised in an uneducated well below the poverty line family and I’m glad I’ve been able to provide a different life for my kids.
BUT – my daughter needs to read your book 🙂
Thanks.
Sure. That last decade is magical. Not only does what you already have double at 7%, but you typically also make some of the largest contributions of your career. So doubling in the last 5-8 is very realistic.
Better figure out how you’re paying for advice. It’s probably a commission.
You are right – I have a lot of things to figure out. At least I have some time left in my career to make some changes.
Thanks!
Ugh – so I read your back to basics mutual fund expense article. It’s a bit dated – has much changed? Looked up the first five funds in my retirement account. All of them have a deferred load of 1.00, ER between 1.56 and 2.14 and 12b of 1%. Looks like I need to do a little more educating of myself and perhaps dumping my financial advisor if I want to maximize my last 5-8 years of income.
This has been an eye opener. Really hope my daughter pays more attention going in.
Obviously not much has changed if people are still paying 2% ERs, 1% loads, and 1% 12B-1s!
I use 2 tools to manage my finances day to day.
1a Mint a free tracker from Intuit (Mint.com) Me and my wife charge EVERYTHING (even fast food purchases) on a Fidelity CC which pays me back monthly, and I pay it off monthly. This automatically generates a category list that is standard in its categories so your not making up odd names that are hard to track.
1b I import into Mint what I don’t pay with CC from my bank. This also generates a category list of the rest of my expenses. Mint will aggregate both lists and I have a daily understand of my spending. My paychecks are direct deposit so get included as credit.
2 I keep my finances, stocks bonds etc listed in personal capital (personalcapital.com) Mint will track them but I like PC better Both companies try to sell you stuff as the way they make money like offering you “free portfolio advice”, Ignore it. Having clear knowledge of investments on one screen is absolutely essential. Money is often divided between different pre-tax, post tax, different brokerages, banks etc etc and it’s a total pain to understand the big pic. This tool does the aggregation. It also allows easy category analysis. Do you keep your bonds and REITS at Vanguard in an IRA but have some BRK.B, S&P and GE at FIDO in a post tax account? It’s trivial t o see how things are allocated, and what needs balancing.
The advantage is you have a clear and accurate perspective on what’s happening with your dough, both expenses and investments. A monthly “budget” is generated in Mint, but I think it’s pretty worthless since a lot of expenses aren’t monthly, but the categories are invaluable. When I want to do budget manipulation and “what if” I down load a CVS file from Mint into a spreadsheet and have at it. Great time saver.
Having a budget IMHO is important. During my practice career I kept tab in my head but now that I FIRE’d and live on a more fixed income it’s a great help to know where the money goes and to plan. Before FIRE I probably would have been a bit more disciplined. The best money to invest is money when you are young. It pays you back 8:1. Money when your older takes a long time to gain value. A categorical understanding of your cash flow tells you when it’s safe to put that extra 10K into the market
Best
Your gas budget for a resident is…interesting. $5k per year at $2.46 per gallon is about 2032 gallons. If you drive something that gets 25 miles to the gallon, that’s about 51000 miles a year or 143 miles per day. That’s a lot of driving.
That is a lot of driving. Just imagine it’s 2008 and you live in London. 🙂 I remember paying $12 a gallon then. Seriously, this post is five years old. I can’t recall what possessed me to put $5K there for gas but I agree it doesn’t seem to fit. Interesting that you’re the first to mention it.
When comparing my budget to that of Attending #1, I found a noticeable difference: insurance. Attending #1 lists $5k annual expense for insurance. I currently spend closer to $15k annually between health insurance ($10k), disability + life insurance ($3k), and car insurance ($2k). I’m beginning to wonder if I am way over-insured?
Probably not. I spend more than you do on insurance. I have $1900 this month budgeted for insurance. Attending # 1 probably has an employer paying for health insurance. Mine is currently almost $1200 a month including dental, and I’ve heard of people whose health insurance is twice as high.
Hello, I am a rising intern. Can someone explain how a resident making 50K is only going to pay 5K (10%) in taxes? This seems very optimistic
$5K might be a little optimistic for total tax. Depends on various things, but that’s VERY doable for federal income tax. If you’re married and take the standard deduction of $24K, that leaves you $26K of taxable income. That’s something like $2500 in federal tax (less if you have kids or other deductions). Of course, you’ll owe 7.65% *$50K in payroll tax = another $3,825. If you’re in an income tax free state, that’s about $6K. Add in a child tax credit and you’re under $5K, maybe even with state taxes. You’ll owe more if you’re single or your spouse is working of course.
Is there a good way to estimate taxes (such as including data like single/married, charitable donations, credits, etc)?
I’m also a rising intern and I’m single with no kids. I’m trying to figure out the best way that I can minimize my tax burden.
There are lots of calculators out there, but the best way I’ve found to estimate is to whip out a 1040 and work your way through it. If you want to change little variables and see how that affects the bottom line, it might be better to use tax software like Turbotax or Taxact. For a simple employee job, the calculators aren’t too bad. Here’s one, but no promises on its accuracy:
https://www.hrblock.com/tax-calculator/#/en/te/aboutYou
I think the reason why budgets are such an intriguing topic is because doctors have the ability to spend a lot in one category even after taking savings into account. I used to make all our meals from scratch. We never ate out or did take out, save an occasional rotisserie chicken from the supermarket. Our middle kid as a toddler was a ridiculously picky and slow eater that it was just not an enjoyable experience venturing out of the home to eat. Now he’s nine and his palate is so much broader we have started eating out and in the last year we probably spent triple what we spent last year on food. And frankly it worried me. We still saved 30% of our gross income last year – less than in previous years but not too shabby. So which number is more important: what you save or what you spend? I am trying to quantify how much we spend on extracurricular activities and summer camps for the kids annually as I grapple with whether or not we start one of our kids in piano lessons. We spend $1500 per month in extracurricular activities not yet taking into account summer camps. So is that in our budget or an absurd immoral amount?
Two issues: what do you value, and will it compromise the future? 1-Is it important that your kids have piano lessons and camp and eat out with you a lot? 2- can you afford to spend it now- apparently so- and will spending for all that keep you from saving enough to do what you want in the future, and will doing all those things make you more likely to spend more in some retirement future where you will no longer have kids lessons and camp to pay for?
What you save. Save enough and spend the rest on whatever makes you happy.
Jim,
I am considering subscribing to the Tiller Budgeting App which is a pay App ($50), but I just feel that Mint and Personal Capitol leave a bit of a void. I find some apps have trouble integrating moving parts on expenses that may come from credit cards, and checking accts etc. I would be interested in your opinion if you are aware of it and how it compares.
Thanks
Duke
Look at You Need a Budget and Every Dollar too.
We put 30K miles a year on our car. If married and both spouses working 50-60K on two cars is believable. I am only one working and my commute is only 15 miles one way.
That’s a lot of miles, but Katie is putting over 20K on hers a year and she works at home. So I certainly believe it.
YNAB for me all day, every day.
I was fortunate to be able to easily get the girlfriend (at the time) aboard after seeing me do it for a year and showing her how it helped me know exactly where every penny was going and I could show her where hers were going if she was willing to try. She did, eventually we merged lives and finances.
YNAB’s allocation budgeting (instead of forecasting) does the following:
#1: Prioritizes creation of an emergency fund
#2: Makes us budget toward the things we value.
#3: Creates an artificial (but very real feeling) scarcity.
#4: Reminds us when we’re spending on things we don’t value (not much in the budget for it!)
#5: Satisfaction of getting to sweep the excess into extra debt payments, and now into taxable retirement accounts
#6: Reminds that the occasional splurge is OK, but it comes at the expense of that retirement account sweep.
#7: Creates a no-questions-asked slush fund for each partner
#8: Shows you when you’re spending money you don’t actually have
#9: Allows you to easily see how well you’re doing on your spending goals
#10: Reports simplify creation of the household annual report.
and bonus #11: Starts discussions with friends about personal finance
…and so much more. I remember when WCI posted something about NOT budgeting anymore. I’m not sure I’ll ever NOT budget. Especially when in Q3 I could easily see that if I squeezed just a little bit I’d hit 60% savings on net income. Ended up at 62%. I don’t have to do that for too many years to be able to retire early.
What if you had twice the money you ever needed and were still working? Then you might not budget quite so tightly. Do we still budget? Sure. But it’s more like just tracking spending so we know we have enough set aside for taxes, so we can calculate out tithing, and so we know how much to invest each month. We don’t really say “Oh, we hit $500 on our eating out money, no more restaurants this month.” It’s been a long time since we needed to do that.
Good morning Dr Dahle.
I’m glad that you are feeling better.
Is there an app that you can recommend that is able to keep track of expenses?
Thank you for all the help.
V/R
SM
We use an Excel spreadsheet because we’re old and inertia. But I’ve heard lots of good things about You Need a Budget (YNAB).
Use Empower. It’s great and will fit into your budget nicely, because it’s free.
It looks like good and excellent examples for a person who is going/donating to a church which is not a case for most people. I do not think Charity $6,500 and Vacation savings $6,000 would be a common practice for doctors.
While obviously not universal, I would NOT say it is uncommon. I know lots of docs that “tithe” a tenth of their income to their church, and that is often well more than $6,500 a year. Often $30-40,000 or more a year. Some spend more than that on vacation and some don’t.
Thanks for the examples. I have seen auto/car listed as a fixed expense. I question that, but somewhat agree. The car payment, insurance, gas, maintenance will become a fixed expense, but prior to that it is a variable expense. For instance, deciding to purchase a $60,000 vs $30,000 vehicle is a variable expense decision, but once the purchase is made becomes a fixed expense. The same can be said about housing and many other fixed expenses.
I am a physician employee. You list $60,000 as retirement savings. The max for over 50 years old to contribute into a 401K pretax is $ 30,500. I would like to clarify: where is the other $29,500 coming from and going to?
I also like to consider my retirement contributions as a fixed expense coming off the top of my salary.
Thank you for your insights!
DSL
You can do a backdoor Roth ($7000 or $8000 for those 50+), Solo 401K (if you have 1099 $$), etc. Also, you can do a Brokerage account (saving for retirement does not have to be in a retirement account… it just means you should not spend it until retirement).
You can also do a Mega Backdoor Roth IRA which allows you to potentially put an extra 46k for a total of 69k (this is without the catch-up contribution) into your 401k.
If the plan allows MBDR contributions. Most don’t.
It comes from your income. It goes into the most tax-advantaged account you can find whether that is a 401(k) with profit-sharing contributions, a cash balance plan, a personal and a spousal Backdoor Roth IRA or just a plain old non-qualified taxable brokerage account.
You’re not limited to saving for retirement to whatever plan your employer offers. You can always save more in taxable.
Hope that helps.