I am convinced that one key to the financial success we have had is what we call our monthly budget meeting. It isn't REALLY about a budget, since Budgets Are For Rookies, and we don't really budget. Budgeting requires you to actually set up categories for spending and to stop spending when you hit the limit for that category. We don't do that, so we don't technically budget. So what is the purpose of this meeting? There are several, which I'll list in order of importance:
- Ensure we talk at least once a month about our financial priorities and make sure we're on the same page
- Ensure we have money set aside for taxes and charity
- Allocate our savings account toward our financial goals
- Calculate our allowances
- Catch fraudulent transactions
Notice that those goals are not “to make sure we're not spending too much” nor “to project our spending for the next month.” In fact, we typically do our “budget” meeting long after the month has ended. The main reason we are able to live without a real budget is that we set up our lifestyle so that we could live and save adequately on what I was paid as a pre-partner. We really haven't had a huge increase in lifestyle since making partner (50%+ raise in my group) nor since WCI started making money. All that extra money mostly just accelerates our financial goals, although we pay more in taxes, give more away, and do spend a little more. So in any given month, the only question is the rate at which our financial goals will be accelerated. We've been married for 17 1/2 years now, so we have done this drill 17*12+6 = 222 times. We're pretty good at it by now. Here's how it happens. We'll use our actual May 2016 spending plan to make things more real.
By necessity, one person has to do a bit more of the work than the other person. My wife did that extra work back in residency, but I've pretty much done it since. This involves inputting the information on to our spread sheet. The first section is income. So I take my total clinical pay from the spreadsheet our managing partner puts together, and the total WCI pay from the spreadsheet that Cindy, my business manager, puts together, then I hunt up any investment income from taxable accounts that we may have had. For May, the income section looks like this:
[Update 12/13/16: Specific income figures removed at the request of a partner. Average emergency physician partner incomes are easily found with a Google search and WCI income reports are published each January.]
- Total: $85,181.91
Those numbers change dramatically month to month, as does the total. Seems like a lot of money, right? It sure does to us. We're amazed every month when we look at it. But to be honest, we've been amazed every month we looked at that number since late 2003, when we were getting her teacher pay AND my resident pay. It was like money coming out of our ears! We were paying off debt and making investments left and right. Same game, different number of zeros..
Okay, let's move on to the expense side of the equation.
- Taxes: $22.999.12
Where does that number come from? It comes from our annual tax planning. As regular readers will recall, we paid about 25% of our income last year in federal, state, and payroll taxes. I think that percentage will be a little higher this year, as we will probably make a little more money and we don't have that huge loss from our accidental rental property that we wrote off last year. So I'm using 27%. So I multiply the income each month by 27%, and that's the amount I set aside for taxes. Remember that figure has very little to do with how much I actually send Uncle Sam each quarter. Our quarterly estimated tax amount comes from last year's total federal tax bill multiplied by 110%, and divided by four. That will keep us in the safe harbor. The 27% is the amount I actually think we'll end up paying in federal and state taxes. That amount goes into the savings account each month, and once a quarter a big fat check comes out of it. Another big fat check for state taxes will come out of it next April.
- 401(k) Contributions: $6104.08
One of the few things pulled out of my partnership distributions before I get it is a contribution to the 401(k)/Profit-sharing plan. Obviously, we hit the maximum before December, at which point those contributions are used elsewhere.
- Charity: $7,907.78
We allocate 10% of our gross minus retirement contributions to charity each year. Actually, we give quite a bit more, but that's what we allocate as we go along. It goes into the savings account like the taxes do and is tracked on a separate spreadsheet. Why do we exclude retirement contributions? Because we plan to pay 10% on that when we pull it out instead of when it goes in. Seems a lot easier to keep track of that way to us.
Those are our big expenses. Now we'll get to the smaller ones.
- Mortgage (PITI): $2,848.64
- Utilities: $372.48 (May is a great utilities month, the furnace isn't run, nor is the A/C, and the lawn doesn't need much water.)
- Insurance: $1,490.52
Those are all pretty self-explanatory. Our last “budget” category is what we call our variable expenses. We currently allocate $5,000 a month to that. It covers everything else, including our allowances. In fact, the size of our allowance is determined by how good we do keeping the variable expenses in check. Whatever is left of that $5K at the end of the month, we split in half and add to our individual allowance categories in the savings account. What do we have to pay for out of our allowances? Things like skis, bicycles, sports leagues, and anything else that we don't want to have to be accountable to our spouse for. Sometimes, we over spend that $5K. That sucks, because it means we get a negative allowance that month and have to pay money out of our allowances into the family account to cover the difference. If that seems to be happening too often, (and we can afford to do so) we increase the allocation to variable expenses.
So at this point, I go through all the expenses we had during the month by looking at the bank account and the credit card statements since we basically don't use cash at all. In May, there were 87 transactions. Some were positive (reimbursements and credits) but most are negative. Some of the big ones in May were $435 for piano lessons, $460 for soccer leagues, a $400 charitable donation, $446 we spent on cycling clothing, and a new bicycle for one of the kids for $673. We had 15 transactions for gas, for a total of $565, 17 transactions at restaurants for $369.80, and 9 transactions for groceries for $945.78. All together, we busted the budget by spending $5,468, so we had negative allowances in May.
So our total income for May was $85,181.91 and our total expenses were $46,722.82 leaving us $38,459.29 to put into our savings account.
But what are we actually spending in any given month? You know, the income that would need to be replaced in retirement? $1500 in insurance (subtract out about $400 for life and disability insurance), $500 for utilities, $2900 for the mortgage (hopefully that would turn into just $500 for property taxes and insurance), and $5000 in variable expenses. So about $7,000 a month. Add in a little slush for taxes, charity, and large expenses we can't cover from the variable expense account, and we're up to maybe $10,000 a month, or $120,000 a year. Assuming $30K from Social Security and a 4% withdrawal rate, that means we can retire when our retirement savings is $2-3M. Very doable.
[Update prior to publication: This post was written last summer, but the serious cash flow issue discussed in this next section actually caused us to change our process a little this last month. In our most recent budget meeting we faced reality and the truth is that our “number,” at least if I quit working before 70, is probably in the $4-5M range in today's dollars. Maybe knock a million off for Social Security. Darn that hedonic treadmill. It's not that we can't live on less, it's that we don't really want to and probably don't have to. More details in an upcoming post, but we think the new process will work a lot better and it certainly gives us a better idea what we're actually spending so we can forecast our “number” better.]
Adjusting the Savings Account
We also spent a bunch of money from savings. For instance, our allowances. My wife finally got around to buying a nice fancy $6000 mountain bike she's been eyeing for a couple of years, which pretty much cleaned out her allowance, and I spent $500 on a mother's day present (Broadway season tickets.)
We also spent $1,700 from our home improvement allocation on cleaning up some mold and replacing a leaky door.
Oh, and we bought a $60,000 car. Where did that money come from? Well, we had a few thousand put away for a new car purchase. We had $38,000 left over in our monthly budget, and then we pulled the rest from savings that was allocated to go into an investment.
So, if you count up what we really spent in May, we spent every dime of our huge income plus another ~ $30K. If you're ever wondering how people go broke on huge incomes, you can now see how. They just make every month look like May did for us.
In fact, the main reason behind this monthly meeting is adjusting the savings account spreadsheet, not the budget spreadsheet. The money swinging in and out of the savings account going toward investments, taxes, charity, and large purchases dwarfs the actual budget amounts.
Calling in the Partner
At this point, I call my wife into the room for about a 10 minute conversation.
First, I grill her (not really, but she always feels that way) about the four or five credit card transactions I don't recognize from the month.
Second, we fight over some silly $18 expense and the fight ends up with “I'll just pay for it out of my allowance.” We've actually gotten much better about these over the years.
Third, I let her know how we did for the month (income, allowances, how much we have left to allocate to our goals etc.)
Fourth, we talk about our progress toward our financial goals and decide how to reallocate the money in savings. When I'm talking about financial goals, I'm not talking about retirement and college and paying off the mortgage, although we talk about all that stuff about once a year. I'm talking about what we want to do with money in the next few months. For example, we're saving up to make a huge investment in a business right now (don't ask, you'll hear about it eventually.) So I had $95,000 of our savings account allocated to that investment. However, she said she wanted to spend $6,000 on some home improvement projects in the next couple of months. So that $95,000 turned into $89,000.
[Update prior to publication: The investment fell through, so we put the money toward the mortgage, more details in an upcoming post.]
Other short term goals we have are to max out the individual 401(k)s for the year by the end of the calendar year (we still had $76,000 to go as of that budget meeting) and we'll need $30,000 for my cash balance plan next March. In other months we might talk about an expensive upcoming vacation, or saving up to buy a car, or some money we want to give to some charities. But after 10 minutes or so, we're pretty much done. There just isn't that much left to discuss after 222 previous discussions.
Putting it All Together
Well, we didn't have any fraudulent transactions, again. We made good progress toward our goals, again. We made sure we're still on the same page with our finances. One reader wisely commented recently that you don't have to be on the exact same page, but you at least need to be reading the same book. I'm sure your “budget meeting” is different from ours, and that's perfectly fine. The point is that you come together periodically, make sure you're saving enough, and align your financial priorities.
What do you think? Do you have a monthly financial meeting with a partner? Why or why not? If single, do you go over your finances periodically? How often? Why do you think it is useful? What does your budget look like? How strict are you with it? How often do you have a month like this where you spend more than you make? Comment below!