Since the main purpose of this blog is to serve as a real-time account of my financial journey from trainee to attending, I am going to start a recurring monthly series of ‘checkups’ wherein I try to critically evaluate my spending patterns and how my money is allocated.
If you only track two major parameters of your financial life over time, many would argue that the two most important are your Monthly Budget/Cash Flow and your Net Worth. The first is fairly simply and should be familiar to anyone who has ever had to pay for their own expenses, while the second can be somewhat nebulous if it’s not something you’ve ever thought about before.
This is the simple yet powerful concept of money-in, money-out. Just like you will never lose weight if you are taking in more calories than you burn, you will never build wealth if you are spending more money than you are making. And as with dieting, it is very easy to screw up by making educated guesses rather than tracking the numbers.
In its most basic terms, a budget is a forward-looking, categorized estimate of income and expenditures. Most will include housing and food, but beyond that its contents will depend on you and your individual spending patterns. Cash flow, on the other hand, is the retrospective accounting of how your budget compared to reality. How much money did you make, how much did you spend, and how much is left over?
Seeing this information laid out in front of you can be eye-opening. Especially in this age of online shopping and credit cards, almost all of the friction of spending money has been removed. Automated, recurring expenses can suck your paycheck away before you’ve ever even seen it. Budgeting gives you the tools to combat this.
This was my cash flow for the month of August. A quick caveat for this month specifically: my income is artificially inflated since I get paid biweekly, and this August I had three paychecks. Let’s break it down.
Housing + Utilities
Almost guarantied to be one of the largest line items of any budget, at least if you don’t have a paid off mortgage. An often-used rule of thumb says that your housing costs shouldn’t make up more than 30% of your gross (pre-tax) pay. This chart uses post-tax income so you can’t see it directly here, but my housing costs make up about 32% of my gross income. My wife and I rent a two-bedroom apartment overlooking a lake and the mountains, so no complaints here. This will be a fairly fixed expense for the next year.
Food + Drink
This one hurt this month. We were on vacation at the beach for a week, and while we didn’t have to pay for lodging, we went kind of bonkers with eating out. This has always been my weakness, and it would be even worse if my wife weren’t an amazing cook with a talent for staying frugal. This is by far the largest flexible expense that we have, and I would love for this number to be closer to $700.
Includes disability insurance (which every doc should get in residency), car insurance, and our AAA membership. Does not include health insurance which I get through my employer and pay pre-tax. I am currently in the process of locking in a term life-insurance policy, so this number will soon go up.
This represents a mix of medical school loans, some refinanced and some still direct federal. For my federal loans, I am in the REPAYE program that caps my payments at “10% of discretionary income”. A larger chunk of my remaining loans are those that I refinanced, on which I pay just $100 per month while in training, regardless of the loan balance. Finally, I have some institutional loans that I am not required to make payments on until I am out of training (and haven’t been, since they are at a relatively low interest rate). This also includes my wife’s loans for her master’s degree. We are both very fortunate in that we have not carried forward any undergraduate debt.
An unfortunate fact of life for right now, while cash flow is more of a concern. This is for a 2015 Honda CR-V which has been an excellent purchase, but hopefully the last car we ever buy with credit.
Gas, parking, and car maintenance. Will also include air travel for any vacations.
Phone + Internet
We unfortunately live in one of the broadband deserts monopolized by Comcast, so this won’t be going down any time soon. We cut out cable TV long ago, and have fairly bare-bones internet. My wife and I are on Sprint and Verizon for mobile (soon to combine to one plan), and while I appreciate the merits of cheaper providers, we live in an area that is rural enough that reliability goes out the window once you get away from the major providers.
Most of this was an aquarium trip…totally worth it with a 20-month old! Otherwise this generally includes movies, Hulu and Spotify subscriptions. As is tradition with our generation, we’re currently mooching Netflix and HBO off of friends and family.
Shopping + Misc
As the name implies, this is a catch-all for other categories not large enough to justify their own spots. Includes clothing, healthcare copays, personal care and grooming, gifts and any other non-categorized purchase.
So you can see that this left a good chunk of change available for saving and investing, but as I said above, this is artificially high due to my three paychecks. It’s so easy to get into the mindset of “I’ll have money for this later so it’s okay to overspend now”, but this is lifestyle inflation at its worst, where it happens before the income even arrives. Seeing the numbers every month is the first step to realizing you have a problem, and taking the steps to fix it.
If cash flow is the weather of your financial health, net worth is the overall climate. While you may think the dermatologist driving the new Tesla is wealthy, it’s harder to make that argument if he has $30,000 to his name and is living paycheck to paycheck.
Net worth is calculated by subtracting your debts from your assets. There are healthy debates over whether this should include the value of your home, but for better or for worse that’s an academic discussion for me for now.
Net worth is what determines your ability to retire, your ability to weather financial catastrophe, and the amount you will have to leave to your dependents and heirs. In this age of massive student debt, just getting to a net worth of zero has become a milestone in and of itself. I hope to have my student loans paid off in the first 2-3 years of independent practice, but my net worth will be zero well before that thanks to my savings and investments.
Budget/Cash Flow and Net Worth are two invaluable tools for the personal finance arsenal. There are a million more things to say about each of the individual items above, but I will save that for another time. Until then, this is a firm foundation and a great starting place for getting your financial life in order.