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  • Writer's picturePhysicians Financial Design

The B-Word

When it comes to personal finance, there’s nothing my clients hate more than when I bring up the dreaded “B-Word” – Budgeting. In fact, having to broach the topic from my end can be a real “B” if you know what I mean. If fact, I’d say the conversation for some can be as uncomfortable as a prostate exam!


The reality though is that physician families who have their expenses dialed in and are intentional with their spending generally find themselves experiencing financial success over time. This article will walk through some strategies for achieving proficiency in this area – one that can be a challenge for many.


The Foundation of Personal Finance

The concept of spending and saving is about as foundational to your financial health as your diet is to your physical health. When you consider that a positive monthly cashflow is the only way to achieve any long-term financial aspiration, you’d think that this would be the focus of any financial plan. Although many people tend to focus their attention on investment returns and tax savings as their main financial strategies, the truth is that intentionally putting money aside for your short-term, mid-term, and long-term objectives is by far the most important aspect of a successful personal economy. Think about it, if you don’t save any money, what are you investing? And if you have nothing in your investment accounts, then what difference does your rate of return make?


Imagine receiving a free plane ticket that says, “Destination: To Be Determined”. Some people would jump on that plane and some people wouldn’t. Regardless of how you’d decide, I’m sure you’d find it foolish of the person who lands in an undesirable location and then gets irritated about the place they find themselves. Then to make matters worse, they’ll have to pay for their mistake by purchasing a ticket to get home. At the end of the day, they would have been much better off not traveling at all than traveling at jet-plane speed in the wrong direction.


The same could be said of the person with no plan for their monthly income. As I always say, our financial resources are simply a tool to help us achieve something that we’ve deemed worthy. For many, it’s buying a house, paying for school, or supporting our current and future lifestyles. However, with no plan in place for how to allocate our income and future income, you may find yourself putting it effort without yielding effective results.


In my experience when it comes to a budget, the most difficult part is establishing a plan in the first place. Therefore, I often refer to this topic as a “Spending Plan” or “Cash Flow Strategy” as opposed to that nauseating B-Word referenced above. Just like any trip, there is always more than one way to get to your destination. Here are a few considerations that might help you get there smoothly and efficiently, depending on what fits your style.


Strategies

The Traditional Budget

There are several reasons why many people cringe at the thought of budgeting, but probably the biggest drawback is simply their lack of success with traditional budgeting techniques. Whether it is budgeting with an online app, using the envelope/cash method, or the traditional pen and paper, it can be a struggle for many. However, if you are a disciplined and/or analytical person who doesn’t mind allocating and tracking your spending religiously, this can be an effective method. You need to understand that this approach takes attention and effort. And, if working with your spouse, everybody will need to be on the same page. If this sounds like your kind of thing, I would recommend you try out YNAB or Mint as an online budgeting tool to help you set and keep track of your budget and spending. However, if you are like most, this can feel like a frustrating waste of time, so I often recommend a combination of the following strategies to win the monthly cash flow battle.


Track Your Expenses

Expense tracking and budgeting may seem eerily similar, but there is a big difference – one is proactive while the other is reactive. With a budget, you pre-set your spending limits by category and then pinky promise with yourself or your spouse not to exceed those limits. Like in medicine, being proactive is usually more effective, but requires more effort and discipline along the way. But if proactive budgeting isn’t working well for you, at least do yourself the favor of tracking your spending at the end of each month. Again, using YNAB or Mint to accomplish this can be useful. By tracking your spending, you can at least know where you are focusing your spending and can work on reducing expenditures in those categories if you aren’t happy with the numbers.


Automate Your Saving

Employer sponsored retirement plans like 401(k)s and 403(b)s are great because you don’t have to take any action to make the savings happen. In fact, you don’t even see the money hit your bank account – it’s like it wasn’t ever yours in the first place! The beauty of this system is the automation. Contributions are made towards your future without you having to think about it or make a disciplined decision to save money every month. If it works for accounts like these, why not replicate this for our other savings goals? To fund your investments for whatever aspirations have been set in motion in your plan, automate them so they leave your bank account every month without having to decide whether you feel like making a contribution that month or not. In this way, you’ll pay your “future self” first and then it really doesn’t matter what you do with the rest of your monthly income (as long as you don’t spend it all before your next paycheck), because your savings goals have already been met automatically. Just remember that your first savings goal should be building your emergency fund until it equals at least three months of income.


Plan and Save for Large Expenses

When you realize the value of savings automation, you begin to see an efficient method for paying for the big-ticket items. You just need to dedicate some funds each month towards a goal. It could be something long-term like your retirement, or something short-term like a vacation. Either way, when you see an expense coming down the pike, you need to plan ahead and begin saving for it. Many banking institutions offer a “sub account” tool inside your checking or savings accounts that allow you to earmark money for certain goals. I recommend using these for anything that doesn’t get paid monthly (like real estate taxes, insurance premiums, vacations, etc.) If you can automate these savings allocations from each paycheck, that’s even better. Then when the day arrives to make the purchase, I usually recommend paying cash, because feeling the sting of writing a big check will help you know whether it’s worth it or not.


Don’t Sweat the Small Stuff

Although over-expenditure can be a big downfall if it is happening consistently, it’s important to not let one bad stretch lead to an “I can’t do this” mindset that can lead to further emotional spending. This is the type of spending that occurs when you’ve thrown in the towel on trying to make headway with your short-term finances. Keep in mind that making a poor financial decision on a big-ticket item is more likely to blow up the long-term plan than some poor stretch of undisciplined spending. Like my coach used to tell me in high school, don’t let a small mistake turn into a game changing mistake.


Reward Yourself

One scenario that happens occasionally is when a physician family over does it on the budgeting stringency. This is often the case for residents on a tight budget to begin with. Failure to strategically and intentionally build in some “fun money” as a reward for successfully executing your monthly spending plan can help you stay motivated to keep at it over the long haul.


Recap

Hopefully you’ve found these techniques helpful and practical for your personal finance journey. Just remember that help with something as simple as budgeting or as complicated as student debt and tax strategies is just one click away. If you could use hands-on support with managing your monthly cash flow, just click on the big yellow button below and schedule your free financial evaluation!



Thanks for reading! For more articles geared toward young physicians and their money, click here or check out The Money Malpractice Podcast on any of the major platforms.


Until next time…KEEP SAVING LIVES AND KEEP SAVING MONEY!



Disclosures

• RichMark Private Wealth Management. LLC is registered as an investment adviser with the State of Michigan, and only transacts business in states where it is properly registered, or is excluded or exempted from such requirements.

• Content should not be viewed at personalized investment advice. Market events and other factors may affect the reliability of the potential outcomes. Simulated growth is purely hypothetical and does not represent actual performance.

• Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment or strategy will be suitable or profitable for a client's portfolio.

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