Financial Planning For Resident Physicians, Item #2 Tell Your Money Where To Go
This is the third article in a series dedicated to helping the resident physician take steps to put their house (financial and otherwise) in order. My previous articles on the subject may be found here.
Item #2 - Tell your money where to go.
As of this article’s posting, Match Day has passed. Congratulations, and I wish you much success as you transition to residency later this year. It’s been a long, hard road, but soon you’ll be earning an income. It’s exciting!
As you approach this important day, make sure you have some fun. Enjoy that first paycheck. Treat yourself (and your spouse and kids, if you have them) to dinner, or something you all enjoy. But don’t forget how absolutely important this first paycheck is. The way you spend it will set the tone for the rest of your life. It sounds a bit dramatic, but getting off to the right start can make a big difference over time.
Budgeting isn’t fun.
There are a few words that I would use to describe budgeting for the resident physician: essential; foundational; important; vital; necessary; intelligent; prudent; practical; worthwhile; etc.
Fun isn’t one of those words—at least not at first.
If you’re human, you probably don’t like the idea of sitting down and crunching the numbers every month. Especially with all of the other things requiring your attention. But just because budgeting isn’t fun, it doesn’t mean that you can’t do something fun while you’re budgeting.
Not long ago my wife and I decided to go out to lunch every month to do our budgeting. Traditionally we had tried to budget on Sunday evenings after the kids were in bed. We found it very easy after a long day to push off budgeting. Under this model, we rarely had the discipline to force ourselves to sit down and budget.
Things continued this way until we decided that we should go out to eat and do our budgeting at a restaurant. Once we decided to do that, my entire attitude towards budgeting changed. If good food was involved, there was no way I was going to miss our meeting. An added benefit was that my wife and I were also investing time in our relationship while being responsible about our finances.
Being on the same team.
If you’re married, you definitely need to recruit your spouse so that you’re both on the same team as it relates to budgeting. If one of you isn’t aware of your account balances and how the money is being spent, it’s bound to leave the other feeling resentful and frustrated.
A few years back I went to a men’s clothing store to get myself a new suit. While there, one of the store managers was very attentive in helping me. I didn’t have a button-up shirt with me so she went to get one so that I could see myself in the suit properly dressed. There were some really nice-looking ties, so she also brought some of those. And I had been wanting a new pair of brown dress shoes for some time, so I grabbed some of those to try on as well.
Man did I look good—or at least I thought I did.
I happily remarked to the store manager that I would take the whole bunch. The cost came out a little higher than expected, but not to worry—this was an investment in myself.
By the time I left the store and started walking to my car, I began to feel a troubled sensation in my stomach. This feeling grew in intensity as I got into my car and started the thirty minute drive back home.
I knew that I was going to have to face my wife with this unplanned and unexpected (and very expensive) purchase.
I was a defeated man already by the time I walked into our home. My wife happily asked how it had gone. I sheepishly told her. To her credit she told me that I should do what I thought was right and let me make the decision.
So I walked back to my car, drove the half hour back to the suit store and returned everything. On my way back I bought myself a candybar to reward myself for the good decision. It was delicious.
I’ve enjoyed telling this story to friends because it’s a nice way to tease my wife; both about the poor decisions her husband sometimes makes, but also because she’s a powerful woman and doesn’t put up with shenanigans like going out to buy one suit and coming back with a whole new wardrobe. But more importantly, this story highlights an important event that signaled unity in our relationship regarding our spending habits, as well as a willingness to correct mistakes.
Sometimes you will be the one about to make a financial mistake and will need to adhere to the council of your spouse. Other times you will be the one offering loving correction.
Begin where you are. There are those who get giddy with excitement about the idea of playing with a spreadsheet to build a budget. I confess that I’m not one of those persons. So if you’re like me, you’re going to need to begin small.
My wife and I started out using a plain white sheet of paper on which we wrote categories and attempted only to track our expenses. Actually, that continues to be our main method—tracking expenses. We’ve added categories and limits to each of those, but have found that much of the battle is just knowing where your money is going.
Should you use an automated budget/cash flow tracking system? I would caution against it. I’ve found that having to manually enter expenses (whether on a piece of white paper, or otherwise) has been key to our success. A tool that automatically tracks and categorizes your expenses is efficient and seems really cool at first. However, I’ve found that because of how easy it is, I rarely look at it.
Currently we use an app called Goodbudget so that we don’t have to remember to write down our expenses until we get home. The app uses the “envelope system” to track how much money we have left over in each category. My wife and I can both update the app with our spending so that we’re always on the same page.
There’s a lot of ways to track your expenses. The best thing to do is choose one and then determine a regular time to meet to budget—while doing something else that’s really fun, of course. You’ll make course corrections in time that will build to an efficient and fun budgeting system.
The importance of cash flow management.
Managing your cash flow is vital because no financial magic can account for irresponsible spending. For this reason, I believe that your savings rate is more important than your rate of return.
Let’s explore a hypothetical example. Assume that beginning now you save $5,000 a year for the next thirty years. At a 7% rate you will amass $472,303.93. Alternatively, if you only achieve a 5% rate of return but invest $10,000 per year you will have $664,388.48. So even if you earn 2% less per year (which is HUGE over thirty years), you’ll still end up $192,084.55 ahead.
Don’t neglect the importance of directing your money to the right places. This begins with budgeting.
Telling your money where to go.
In Dave Ramsey’s book The Total Money Makeover, he describes a budget as a tool to tell your money where to go, instead of wondering where it went. I love that concept. If your income is the financial engine that enables you to care for yourself and your family (and then some), your budget is the regular tune-up to make sure that it’s a highly efficient and functioning machine.
These are my opinions, unless I’ve specifically cited other material. The information and ideas I’ve presented are for information purposes only. Before you implement anything, make sure you have a thorough discussion with a qualified professional who understands your situation.