As physicians, you never have too much time on your hands. In fact, it’s just the opposite. Every day, you continually juggle work and family obligations. So when you have free time, the last thing you want to do is manage your money. But taking control of your finances today is the first step toward a secure tomorrow. And it begins with creating a budget.
Without a budget, it’s easy to lose sight of your goals and your money. A budget, however, can keep you on track and give you a clear picture of your finances.
In corporate America, the budget is some 500-page document that only accountants can decipher. But as a personal financial planning tool, it can be a one- or two-page document that summarizes your income and expenses. A budget can be as simple or as complicated as you want. The simplified version gives you an overall picture of where your money is coming from, when it’s coming in and how it’s being spent.
When you know where your money is going, you’ll be able to properly plan for the future. You can achieve short-term goals, such as paying the monthly bills or taking an educational seminar. You’ll also be able to accomplish long-term goals, such as buying a new home or car, or paying for a wedding or a vacation.
When you create a budget, you’ll be amazed at where the money goes. In the bestselling book, Automatic Millionaire, David Bach suggests looking at where you spend small amounts of money every day. It’s the little stuff that could add up to all the money you’d need to save.
For example, if you could pocket $10 a day, you would save $3,650 a year. Doesn’t sound like much? If you invest that $10 a day for 35 years at 10 percent (which is what the stock market has averaged for 50 years**) you’d have $1,163,796. Get your spouse involved, and you could potentially become multimillionaires.
Typically, we spend money based on what’s important to us. By understanding our values, we can make the best decisions. For instance, is paying down the mortgage, saving for your children’s education or your retirement a priority? Do you pay your credit card balance every month? Or are you more concerned with your quality of life today? Do you feel comfortable using some of your savings for a vacation, trading up to a larger home or buying a new car? Are you prepared to borrow to finance some of your goals? Do you impulse-buy?
When looking at your spending habits, take your values into consideration. This will get you thinking about how you spend and how you can reduce your expenses in the future.
Goals give direction to life and help us acquire those things we may not otherwise have. If you have a family, get them involved in setting goals. Ask them to list their goals for the next three months, for the end of the year and in three years’ time. Some goals will have priority over others. Identify those that are most important and work toward them first.
Make sure you put money aside in your spending plan. If, for example, your goal is to save $10,000 in a year, then you need to set aside $833 a month in a high-interest savings account. To achieve your goal, treat the money as if it were a bill to be paid to yourself. Then move on to your secondary goals. Once you have a goal in mind, you’ll find it easier to think about any situation you may need to change to achieve it.
Generally, a monthly budget is adequate for personal financial planning. But for the first month, do a daily budget. This is going to be time-consuming and painful, but you’ll find it to be a real eye-opener. You’ll surprise yourself on how many discretionary items you purchase daily. This reminder gives you the opportunity to change your spending behavior quickly.
When creating your budget, you can use a spreadsheet or simply write on a piece of paper. Write your income, which is generally easy to calculate, at the top. It usually consists of practice income, salary, consulting fees, rental property income, commissions bonuses, interest and investments. If your monthly income varies, just use an average.
Then come your expenses, which are fixed and variable. Fixed expenses are regular payments for the mortgage, insurance, car, personal loans, credit cards, taxes for self-employed workers and your savings program.
Variable expenses are more difficult to track, since they usually change monthly. Some examples are food, clothing, utilities, child support, alimony, transportation, long-distance telephone, club memberships, vacations, household supplies, gifts and contributions, personal care, recreation, babysitting, pets and miscellaneous purchases.
If you’re set up with online banking, you can log in and get your regular monthly expenses. This is often the quickest and most accurate representation of your current cash flow situation. Most credit cards give you the option to check your purchases online as well.
Create Your Own Plan
After tracking your income and expenses for a month, you should have a handle on what’s coming in and what’s going out. Then it’s time to put together a spending plan that will help you meet your financial obligations and reach your goals. This plan is a guideline and, therefore, should be flexible. Keep the following points in mind:
- Make a note of your fixed and variable expenses. When you total your expenses, they should be equal to or less than your income.
- If your first plan is too laden with expenses, think about the expenses you can reduce without sacrificing the quality of your lifestyle. Fixed expenses are based on previous spending commitments, so they’re usually unchangeable.
- Look at variable expenses that can be reduced or postponed until a later date.
- Include an emergency fund. Try to build a cushion of three to six months to help you prepare for the unexpected, such as loss of employment, car repairs or illness. This will also help you avoid taking on additional debt.
- Once you have a good estimate of expenses, subtract that figure from your income. Use the remaining money for your savings or goals.
- If your expenses are more than your income, you need to rework your figures or reduce your expenses until you have enough leftover cash to meet your savings target. By comparing your estimated expenses to your actual amounts, you’ll be able to see whether your plan is working. It’s impossible to keep track of every penny, but this will tell you whether you’re within your spending limits.
Tracking Your Results
As with any program, you need to know you’re heading in the right direction. Therefore, you have to evaluate your spending plan regularly. At the beginning, review your budget monthly. Then, as you get more used to modifying your spending habits, you can do quarterly reviews. If you find quarterly reviews don’t give you the results you want, move back to monthly. The more often you review your budget, the more likely you are to follow it.
But you may need to adjust your plan. Look at the different categories and determine whether you’re satisfied with how you’re spending your money. As changes occur, you’ll have to make financial adjustments. Your future expenses and income will change, and so will your budget.
It’s more important than ever to make sure you can retire comfortably and within your means. The first step is to take financial control of your expenses. The simplest and easiest way is to create a budget and stick to it.
To help motivate you, add short- and long-term goals to your budget. Whether it’s buying a new BMW or a retirement home in Maui, you need to be committed to withstand the small pain of money management today for the long-term gain of tomorrow.
**Past performance is no guarantee of future results.