WCI Financial Bootcamp Step # 3 A Spending Plan
Welcome back! I'm glad you're still here. How did your homework last week go? I hope you now have both disability insurance and life insurance (if needed.) If not, flag this email for later review and go back and do last week's homework. The knowledge doesn't do you any good if you don't do anything with it. Today we're going to talk about spending, which is critical to any financial plan. If you spend all your money, you can't save anything. If you can't save anything you can't invest anything. If you can't invest anything, you'll never be financially free and at some point, that lack of freedom is going to make you very unhappy. Before we get into it, a word from this week's sponsor.
Step Three Sponsor
This newsletter is sponsored by Bob Bhayani at drdisabilityquotes.com. They are a truly independent provider of disability insurance planning solutions to the medical community nationwide and a long-time WCI sponsor. Bob specializes in working with residents and fellows early in their careers to set up sound financial and insurance strategies. He has been extraordinarily responsive to me any time any reader has had any sort of an issue, so it was no surprise to get this feedback about him recently from a reader:
Having had some pretty terrible financial salesmen come speak to my residency program....I'm trying to do better now that I curate our conference as a chief...[Bob] was generous enough to come speak with us last week. Bob was knowledgeable, straightforward, and answered all of our questions. I wouldn't hesitate to recommend him to anyone and his place on your "recommended" page is well-deserved.
If you need to review your disability insurance coverage to make sure it meets your needs, or if you just haven't gotten around to getting this critical insurance in place, contact Bob Bhayani at Dr. Disability Quotes.com today by email at info@drdisabilityquotes.com or by calling 973-771-9100
Step 3: Spending Plan
Can I Skip This Step?
Do you have any consumer debt? (credit card, auto loans etc.) Do you have a written spending plan (i.e. a budget) in place that you compare your spending to at least once a month? If you have no debt and have already aligned your spending with your values – Congratulations and well done! You may move on to the next chapter.
Credit Cards Aren't For Credit
As Americans, we have a serious problem. We spend money we don't have on stuff we don't want to impress people we don't like. The problem has become so bad that "getting ahead" for many simply means getting back to being broke. The average US household owes $15,000 in credit card debt, $27,000 in automobile debt, $48,000 in student loans, and $166,000 in mortgage debt. Unfortunately, physicians and other high income earners aren't exempt from this phenomenon and in many cases, despite their high income, their debt totals are even higher. In short, being in debt has become "normal." Surveys show that 1 out of 4 physicians admits to living beyond her means and carrying credit card balances from month to month.
Part of the issue for physicians is that many of them have to borrow astronomical sums to pay for their medical school tuition and living expenses. This experience habituates them to being in debt. So when they get out of school, they continue the habit right through residency and into the rest of their lives. Nearly every physician I've interacted with is entirely too comfortable with debt. While there may be some times in life when it cannot be avoided, debt and particularly the spending habits that tend to go along with it, has a serious drag on the accumulation of wealth and financial independence. Do yourself a favor and become uncomfortable with it.
Credit cards aren't for credit, they're for convenience. Studies are quite clear that you spend more when you use them for your purchases. If you are saving plenty of money, that's probably no big deal. If you are not, a great way to decrease your spending is to use a debit card, a check book, or even better, cash. But whether you use cards or cash, if you are carrying a balance on a credit card you have proven you cannot handle it. Cut up your cards, treat paying off the balance as an emergency, and never use them again.
Using an auto loan to purchase a car is also silly as an attending physician. A reasonably reliable car that will last years can be purchased for $5-10,000. A typical physician making $200,000 per year gets paid that much every two weeks. Surely that amount of money can be saved up without difficulty within 2-3 months. If you wish to drive something nicer, that's fine, but purchasing it on credit by definition means you cannot afford it. Wait until you have the money and then buy the car. If you are currently making car payments, it is reasonable to keep the car if you can have it paid off within one year. Then keep making the payments to your bank account so you can pay cash for your next one. If you cannot pay your car off in a year, sell it and purchase a $5,000 car. You can upgrade it in a year or two when you have the money. The same perspective can be taken with most items in your life. Vacations should be paid for in advance. Boats, ATVS, snowmobiles and other toys are a lot of fun, but they're even more fun when you know they're paid for.
Establishing an Emergency Fund
An emergency fund is a pool of money invested very safely that can be accessed quickly in the event of an emergency. The purpose is to prevent you from having to go into debt or sell long-term investments in the event of a major financial event such as illness, job loss, car wreck, appliance malfunction. A typically recommended amount is 3-6 months worth of your typical monthly expenses. Some of this can be kept in cash at the house, some in your checking account, and the rest should be invested in a high-yield savings account, money market fund, CDs, I Bonds, or a short-term bond fund. An emergency fund allows you to avoid debt, worry less about your investments, and raise the deductibles on your insurance.
Getting What You Want Out Of Your Money
"Budgeting" has a bad reputation for making people miserable. I prefer to think of a budget as a spending plan. It allows you to decide a priori how to spend your money. If you're smart, you will choose to spend your money in a way that maximizes your happiness – that is, you'll spend more on experiences and stuff that make you happy, and less on things that make you unhappy.
The key to budgeting is to "give every dollar a name" before the month begins. All of your money is allocated to various categories at the beginning of the month- so much for food, so much for utilities, so much for entertainment and so forth. When you run out of money in a given category, you quit spending until the next month.
Sure, it requires some discipline to be successful, but if you have the discipline to successfully pass USMLE Step 1, you have the discipline to live on a reasonable budget. The good news for most high income professionals is that they don't even have to be frugal to live on a reasonable budget, they only have to be relatively frugal – that is, frugal relative to their income. They can probably still spend two or three times what an average American household makes and still be just fine.
Some Budgeting Tips
There are dozens of different ways to budget and plenty of technology to help you, ranging from pencil and paper to a spreadsheet to software like Mint, You Need A Budget, or Every Dollar. Use whatever works well for you and, if applicable, your partner. Successful couples realize that unless they are both working together they are unlikely to be successful.
Some successful physicians have discovered that they don't even need to really budget by category if they just take their savings off the top as soon as they're paid. Even better, you can set up automatic transfers to your savings and investing accounts so this all happens without requiring any work or willpower. They can then spend the rest guilt-free and still be very successful. In some ways, a budget is simply "training wheels" until you can train yourself to get your spending down to a level where you're saving enough to reach your goals.
Try to minimize your fixed expenses so the majority of your budget consists of variable expenses that can be decreased as needed or preferably truly discretionary expenses that can be eliminated completely if necessary. That way when an unexpected expense comes up, or income drops for some reason, you don't even have to touch your emergency fund but can simply shift spending from other categories to cover it. Some couples find that having a small "allowance" that they can spend without having to account to their partner for it helps them to stick with the plan.
If you're not sure where to start with your budget, start by going back to the last 1-3 months and just write down whatever you spent your money on. Most people who do this realize they're spending a lot of money on stuff they don't care about that isn't making them any happier. Cut back on that stuff so you can spend money on what really matters to you. In the end, a spending plan just helps you align your spending with what you actually value. Whatever it takes for your plan to work, put it in place, write it out, and follow it. You won't have anything to invest if you spend your entire income.
Your Chore List
- Establish an emergency fund (i.e. open an account, put some money in it, label it your emergency fund)
- Pay off credit cards like your life depends on it
- Pay off auto loans within one year or sell the car(s)
- Develop a written spending plan (Yes, physically write it down this week)
- Going forward, commit to pay cash for everything in your life except your home
Other Resources
How to guide to budgetingBudgets are for rookies
Emergency funds and avoiding debt
Quit buying cars on credit
Spending in ways that increase your happiness
Three steps down. Nine to go. Get your homework done and I'll see you next week
Jim
James M. Dahle, MD, FACEP
Founder, The White Coat Investor
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