Like most people, as a doctor, you have a lot of decisions to make with your income. For the most part, your money goes toward your lifestyle choices: Do you rent or buy a house? How much home do you really need (and do you want the monthly payment that goes with it)? Do you pay off your student loans early or keep sending in the minimum?
These lifestyle decisions might not seem like a big deal when you’re making a six-figure salary, but they do matter. The choices you make on where to spend your money compound in the future. Whether the effects are in your favor or not depends on how well you manage your income.
Strategic budgeting doesn’t mean you can’t live well. It means that you know where your money is going and you’ve made a decision to allocate it there. With these four budgeting tips, you can manage your income in ways that compound to create a healthy and stable financial future.
1. Choose Your Lifestyle Early
Lifestyle creep is a real thing for physicians. It happens when the people you hang around spend their money in ways that you envy or feel like you need to copy.
In common slang, it’s known as “keeping up with the Joneses.” Your colleagues have a fancy car and a big house. They go (or send their families) on expensive vacations, and wear name brand clothes. Suddenly, you worry that your moderate lifestyle is inferior, and you begin the slow creep into spending more than you planned.
This lifestyle creep happens because physicians are stereotyped to have a certain look and live a particular way. Soon, you find yourself living outside of your means.
But if you (and your spouse, if applicable) make a decision to only spend a percentage of your income on expenses and save the rest, you don’t need to worry about losing your retirement savings on a house that’s too big or a car with gadgets you don’t use. The key to smart budgeting is to stay firm in your decision to have a strong financial future by making wise spending choices now.
2. Set Your Financial Goals
How much of your salary should you keep for expenses versus how much should you allocate to savings and paying off bills? This number varies for everyone, and it depends on your financial goals.
Consider the following factors before you budget your income:
- What are your current expenses?
- Are there any large expenses you expect to have soon that need to be in your budget?
- How much do you want to have in your emergency fund? How far away are you from that target?
- How much do you need to make each month to pay for your preferred lifestyle? How far are you from that target (or how much over are you)?
- When do you want to stop working full-time or retire?
- How much money do you want to have when you retire?
These answers will help you make strategic choices about whether you currently have more money than expenses or more expenses than money.
3. Cut Your Expenses Where Possible
Some financial experts suggest you’re in the “safe” zone if you can follow the 50-30-20 rule, where 50% of your income goes to needs, 30% to wants, and 20% to savings. If you’re not there yet, or you want to increase your savings, consider where you can cut your expenses without sacrificing too much of the lifestyle you want.
Depending on your circumstances, it may be possible to refinance your car or mortgage at a lower interest rate. Trading in your vehicle for one with a lower monthly payment often has the added bonus of reducing your car insurance premiums.
In addition to your auto insurance, you may also be able to reduce your monthly healthcare costs by taking out a high deductible health plan (HDHP). If you don’t use your insurance regularly, an HDHP combined with a health savings account (HSA) is often more cost-effective than a low deductible insurance plan. This article by OJM Group discusses the pros and cons of an HSA to help you decide if it’s right for you.
Review your expenses and decide if those funds are well-spent, or if it would be in your best financial interest to cut the bill and put the money elsewhere.
4. Pay Off Your Interest-Bearing Debt
Financial stability happens faster when you aren’t paying interest to a lender. Instead, you put that money in your savings or investments.
If you have any interest-bearing debt like credit cards and loans, get strategic about how you can pay them off as quickly as possible. Look at the balances due, your minimum monthly payments, and interest rates. What kind of plan can you make to eliminate these bills one at a time? Do you have enough flexibility in your budget, or would it help to get a side gig, like a locum tenens job, until your most expensive debts are paid?
Once your interest-bearing debt is paid, you can use that extra money to work toward financial independence. This number is different for everyone. Some financial advisors use the Rule of 72, which harnesses the power of compounding interest. This rule uses factors like your investments, current finances, and retirement goals to determine how much you’ll need to save.
Conclusion
Budgeting as a doctor can be a challenge, especially if you have more wealth than you’re used to. It’s easy to spend outside your means and let lifestyle creep reduce your financial stability. But with these simple tips and strategic financial planning, your financial independence is within reach.