Many physicians fall into the fallacy of assuming that once they make attending-level income, budgets are not needed. However, many key decisions, whether personal or professional, require financial planning and projections that are impossible to make without understanding where you are, what your trajectory is, and where you're hoping to be and when. That's likely why personal finances and investing related questions are some of the most popular on our communities. A budget is a great way to map out your priorities with your spending and ensure you're on track to meet the goals you specify in your financial plan. This page covers the basics of budgeting and tracking your personal finances to make sure you're on the path to financial wellness, as well as provides you resources to do this effectively.
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Empower is free way to aggregate your accounts and get a comprehensive overview of your finances. It includes lots of retirement tools/trackers/long-term financial tools that address questions often asked on the group in terms of tracking net worth, a savings tracker that shows you if you’re on track towards retirement goals, budgeting, cash flow, and fancier things like a retirement planner that will calculate your projected monthly income by your desired retirement date, planning for your kids’ education costs, portfolio allocations, and even analyzing the fees in your investments to make sure you’re aware of hidden fees. Empower Personal Wealth, LLC (“EPW”) compensates us for new leads. We are not an investment client of Empower Advisory Group, LLC.
Simplifi is a budgeting app aimed to help you save time while saving money, letting you manage your finances in five minutes per week. It automatically downloads and categorizes your transactions, then creates a personalized budget based on your income, expenses, and savings. PSG members receive a one-month free trial through our affiliate link.
YNAB (You Need A Budget) is an impressive app that's laser focused on budgets and very customizable. They have a REALLY loyal following, and people swear by it. It's not free (but also not expensive) - there's a free trial if you want to try it out and play with it.
QuickBooks is an all-in-on business solution suited for small businesses. It can help you track income, expenses, and stay ready for taxes. We've partnered to offer PSG members an exclusive 30% off discount using our affiliate link for QuickBooks Online and QuickBooks Payroll products for their first 6 months. (See their website for full discount details and any exclusions.)
Quicken offers a range of different personal and business finance tools, from personal finance managers to more complex features include Schedule C and P&L reports, as well as cash flow tracking. It can help you manage your self-employed and real estate finances seamlessly with your personal finances. PSG members receive 50% off Quicken's entire suite of products through our affiliate link.
Our financial advisor database can help you find a fee-only, fiduciary financial advisor to pull together a comprehensive financial plan to help build a blueprint to reach your personal finance goals.
Some of our favorite personal finance books are listed here.
Understand Where You Are and Determine Where You Want To Go
Early in your career, financial decisions are a fairly straightforward compared with later on in your career. You've got lots of bills to pay (student loans, mortgages, childcare, just to name a few), you're just starting to fund retirement and build your emergency fund, and there's not much excess. Building your budget in this situation is often quite simple (see below).
However, once you start having a little extra left over in your paycheck, the question of where to put that money comes up. Often, without a game plan in place, people tend to just spend the money instead of being intentional about how that money can get them to their long term goals. Over 50% of Americans earning 100K or more say they live paycheck to paycheck. With lifestyle creep a known condition that afflicts physicians, getting on a budget (and sticking to it!) can help prevent you from becoming the stereotype.
Unlike the basic algorithm we outline in personal finance 101 that everyone should start with as the foundation for financial success, budgets can look very different for every physician, as everyone's individual circumstances are different. There is where personal finance really starts to become personal. As you start weighing different decisions in your career, we suggest starting with these questions. While they admittedly seem very big picture, they are going to determine where you invest your money and how much you feel you need to save on a monthly basis.
How much do you need to earn on a monthly basis to have the life that you want?
Where do you want to be in five years? Ten?
How long do you want to work full time?
Do you want to retire early, and if so, when? What does ideal retirement look like to you? How much money will you need to do that?
Are you trying to establish passive income? Why? Is the goal to cut back on your clinical hours or just to have more cashflow?
How many kids do you want, and what kinds of expenses would you like to cover for them?
How comfortable am I with debt? Do I want to be debt free, or do I want to leverage debt to create more income, but know that I will have large monthly payments for a longer period of time?
Knowing your financial and personal goals gives you a concrete idea of how much money you will need and at what point in your career, and from there, you can work backwards on what you need to do to get there (do you need . It's also a great motivator on harder days along the way. It's also important that you discuss these questions with other key stakeholders in your decisions, such as your significant other. The key to any successful budget is having buy-in from everyone spending that cash.
Building Your First Budget As A Physician
You budget doesn't have to be the end-all-be-all, no substitutions, no flexibility law you might be picturing. A budget is simply an intentional plan to make sure your money is going towards what matters to you the most.
Before You Start
Before you compile your first budget, it helps to pull together your prior spending history and an overview of your current financial state and net worth. Our partner, Empower, offers a free net worth calculator as part of their Personal Dashboard that can help you get started. (Empower Personal Wealth, LLC (“EPW”) compensates us for new leads. We are not an investment client of Empower Advisory Group, LLC.)
To calculate your net worth, you take the value of what you own (including cash on hand, retirement accounts, equity in real estate, etc.) and subtract everything you owe (mortgages, student loans, credit card debt, personal loans, car loans, HELOCs, etc.).
Not only does calculating your net worth give you an idea of where you're starting in relation to your goals, but it pulls together a lot of the expenses information you'll need to make your budget.
How to Structure Your Budget
A budget takes into account all the income that comes into your household monthly and subtracts out your monthly expenses. Do you have to do a budget on a month-by-month basis? No, but it's generally the most accurate and effective way to budget, as it helps you track your spending and catch areas of concern before they become a problem. Early in your career, you'll probably need to do it this way, and as expenses stabilize and become more predictable, you can tone it down.
In a zero-based budget (incoming - outgoing = zero at the end of the month), the surplus between what you earn versus what you need for living expenses is what you have to allocate to your goal, or goals. Some "fun" goals can be:
Paying off your student loans
Saving up for a down payment for a house, either your primary residence or real estate investing
Saving up for a dream vacation
Building capital to start your own private practice
Saving for retirement
Another benefit of a monthly budget is it allows you to get a specific picture for each individual month. For people who get paid bi-weekly, some months have more paychecks than others. For physicians with side gigs or who own their own business, income can fluctuate month-to-month. Adjusting your budget each month to your actual income can ensure you aren't overspending and dipping into your emergency fund on smaller income months.
You can structure you budget in whatever way works best for your household. Here's a list of common categories to give you an idea, but feel free to customize it for whatever makes sense to your situation. Some people like to group similar expenses (housing as one category, food & entertainment as another, etc.) while others like to group expenses by type (essential expenses, discretionary spending, savings, debt, etc.)
Income
Salary
Bonus
Essential Expenses
Housing (mortgage/rent, HOAs, property taxes, utilities, etc.)
Transportation
Life and disability insurance premiums
Health insurance premiums and copays
Groceries
Discretionary Expenses
Entertainment
Gifting and charitable contributions
Dining out
Savings
Investment contributions
Quarterly taxes (for self-employed individuals)
Debt Repayment
Where To Budget
If the list above gives you a headache, don't worry: you don't need a complicated Excel spreadsheet full of complex formulas and color-coded expenses (though you can make one if you want); there's an app for that! There are several different, in fact, that offer different features. We like and have partnered with YNAB and Simplifi.
Old school pen and paper also work. The best budgeting technique for you is the one that's the easiest to implement and keep up with. You want your budget to be a tool to help you reach your financial goals, not an additional chore to keep track of when you're already stretched thin between life and work.
Expect a Learning Curve
Pro tip: if you've never done a monthly budget before, your budget won't be perfect the first month. Or the second. Or even the third. That's okay! Budgeting is a skill as well as a tool. It takes time to build the muscle.
Budgeting with an Irregular Income
If you aren't a standard W-2 employee, your income can fluctuate every month. How to budget on an irregular income might be confusing at first. Here are a few tips.
Review your income for the past six to twelve months, depending on how variable your income is (the more variable, the more months you should check)
Use the lowest income as your baseline and make sure this covers your minimum essential expenses each month. If it doesn't, you'll need to save in higher grossing months in order to cover minimum expenses in the lower grossing months.
Once your essential expenses are covered, prioritize your discretionary and savings goals to allocate the remainder of your pay each month. In higher paying months, you may hit all of them! If not, this gives you a guideline on what to focus on each month as money comes in.
Make sure you take into account your estimated taxes and prioritize them as either an essential expense or your top priority after essentials. Entrepreneurs and 1099 contractors new to self-employed income often find themselves in a situation of high penalties and interest come Tax Day, not realizing they were required to make tax payments throughout the year.
While apps like YNAB and Simplifi help with the budgeting aspect for self-employed individuals, when it comes to tracking self-employed income, a more robust software packing is usually preferred. For straight 1099 employees, a simple spreadsheet might be enough to help you track your income and expenses for the year. If you have a small business or more complicated side gig, software like QuickBooks and Quicken can help you stay on track for tax time.
Saving for Retirement
Investing is a key component to personal finances. The more you invest and the longer you leave it plugged in, the more opportunity compounding interest has to work its magic. When building your budget, consider paying yourself first. Treat at least some of your retirement savings as an essential expense that you pay to yourself instead of a lender.
A question we see a lot in our communities is "How much do I need to retire?" It's such a difficult question to answer because it depends on what your definition of retirement is, like we discuss above, as well as the cost of living where you live and fixed expenses unique to your family. For many, the 4% rule can be a great guideline, or at least a good place to start.
4% Rule To Calculate Your Financial Independence Number
For example, if you think you need $100,000 a year in retirement to live off of, your financial independence number is ~2.5 million dollars. If you think you'll need $250,000 in spending money a year in retirement, your financial independence number is going to be ~6.25 million dollars.
Some things to keep in mind
That number is the amount of money needs to be invested, as it needs to be earning money, and the assumption is that you are withdrawing money from the portfolio gains and not depleting the principles. This assumes steady withdrawals and historical market returns and has been proven to be effective over time, including recessions, etc.
If you want to be conservative, we suggest calculating a safety number using 3% instead of 4% right now given the current inflationary environment.
The number of years you anticipate spending in retirement matters, as this rule has not been proven with early retirement (>33 years spent in retirement). This is because inflation has a longer time to work and costs tend to increase with age.
Rule of 72 to determine when you'll hit your FI number
Also remember when calculating your financial independence number and when you'll get there that it's your SAVINGS that matter, not how much money you make, and what you're doing with those savings and how they're growing. If you save a lot of money but don't invest it, it's going to take a lot longer to get to financial independence, because your money won't be growing in the background.
The Rule of 72 is a good benchmark used in personal finance to help with assessing your investments and determining your current financial position. This simple formula (divide 72 by your investment's average rate of return) helps you estimate how long it will take your investments to double.
Here's an example: You currently have two million in retirement at the age of 45 and want to know if it will be enough to retire by 67 without adding any more to your retirement. If your investments have an average rate of return of 8%, using the Rule of 72 we know your investment will double every 9 years (72/8=9). So at the age of 54, you'd have about four million in retirement, at 63 you'd have about eight million, and by 67 you'd be looking somewhere between nine and sixteen million.
The Rule of 72 can't determine how much you will need in retirement, but it's a quick and reliable way (at moderate rates of return) to estimate how much your investments are likely to grow, so you can plan accordingly in conjunction with your 4% rule.
The Rule of 72 also shows the power of compounding interest and why it's important to be intentional with not just investing but with where you are investing. While we like short-term investment options for certain scenarios, the Rule of 72 shows why they aren't good long-term strategies overall for the bulk of your investment portfolio. It also shows why:
If inflation goes to 8%, the purchasing power of your money will be half of what it is today in 9 years.
Paying 9% interest on your student leans means the amount you owe will double in 8 years if you're not paying them back (think about long residencies/fellowships and what happens to people's loan amounts).
Paying a financial advisor a high AUM fee to manage your money will significantly eat into your earnings and your long term trajectory of your portfolio's growth. This is why we always say that if you elect to use a financial advisor to help you manage your finances, pay close attention to their fee structures and any hidden fees.
Saving for Retirement
If you're just starting to save for retirement, a general guideline to begin with is aiming to save 15% to 25% of your income (as a resident, we understand this isn't usually possible, but it's a great goal once you get your first attending paycheck). Once you have high-interest debt paid off, this can open up more discretionary spending, which can allow you to not only enjoy life more, but save more to ensure you enjoy your retirement as well.
The key when determining your retirement "number" is making sure that for the vast majority of your retirement, you are living on the interest and gains in your investments instead of drawing down your principal (this is the basis for the 4% rule above). Again, this is individualized and recommended as a baseline. If you have tens of millions and a comfortable but not lavish lifestyle, you can afford to peel off the principal at times and still be fine! This ensures you'll have enough money to comfortably live throughout retirement without having to worry about market downturns, fears about the costs of long-term care, or rising medical expenses as you age.
Our partner Empower offers both a retirement planner and an investment check up to keep you on track. (Empower Personal Wealth, LLC (“EPW”) compensates us for new leads. We are not an investment client of Empower Advisory Group, LLC.) If you've dabbled with personal finance planning tools in the past and don't have the time or interest - or your particular financial situation is highly complex with multiple variables factoring into your savings potential long term, then you may want to consider hiring a financial advisor. Not only can they help you pull together a comprehensive financial plan to get started, but they can make sure your money is invested well so that it's growing and using the power of compound interest in your favor.
Getting Started with Investing
It's never too late to get intentional with your personal finances and retirement planning. If you haven't learned about investing, we have plenty of resources to help. The more your investments grow - and the less you pay in taxes on the growth - the harder your money works for you. Make sure as part of your financial planning that you have a basic understanding of what your money is invested in. We recently covered the three-fund portfolio as a great investing option for busy physicians.
If you're interested in learning about FIRE (financial independence, retire early) and how to invest with financial independence and/or early retirement in mind, check out our page here.
Conclusion
Whether you enlist outside professional assistance or go the DIY route, here are a few of the key areas to make sure you check off when tracking your personal finances:
Know your goal. You're much more likely to stick to your budget and invest if you have a concrete goal you're working toward.
Calculate your net worth. Not only will this help you pull together your budget, but it will give you an overview of your current financial situation.
Build your budget. Setting a monthly budget is one of the best ways to help you avoid the "doctor lifestyle creep" we warn graduating residents about. This helps make sure retirement is a matter of when, not if.
Track your progress. Investment trackers, retirement planners, and budgeting insights are a great way to stay on top of your personal finances to make sure your money is working hard for you so you won't always have to work hard for it.
Understand your investing. You want your money working hard, which means you have to understand the different investments your money goes into. Never investment in anything you haven't researched to develop a basic understanding of.