You Cannot Build Wealth Without a Budget

Evidence based insights into physician compensation, RVUs, contracts, healthcare economics, and personal finances. For residents, fellows, and early-career attendings.

Life and Finances, in Medicine.

Bruno F. Casanova, MD
Founder, MD&D: Medicine, Dollars & Decisions

What Is This?

Regardless of where you are in your career, budgeting is essential to building wealth. You cannot build if you don't know what you own, what you owe, and how much you make.

Why Does This Matter To You?

Perhaps the biggest financial jump in our professional life is the transition from resident to attending. So, if you are about to become an attending and you haven't learned to budget, chances are that the first thing you will do when your income goes up, is to spend more. And you may even end up spending more than you can afford.

I have been creating budgets since I can remember. Some budgets were better than others, but all of them helped me better manage my money, and plan toward my goals.

A Budget Is Not a Sign That You Don't Have Enough

That is a misconception. That is not true. Budgeting is a way of understanding where your money goes and making decisions about what you want to accomplish with that money. Otherwise, why would all companies have a budget?

You don't need a large income to start budgeting. As a matter of fact, it is easier to establish the habit when numbers are smaller. If you can learn to allocate fifty dollars here and a hundred dollars there, you will be better prepared to manage much larger amounts.

How I Make My Budget

There are a thousand ways to create your own budget. It is a very personal thing. I do it the old-fashioned way. I use Excel because that's what my generation was trained to use. But you can use Google Sheets, an application, or whatever method works best for you. The tool is not what matters. What matters is that you are consistent.

If you are listening to this podcast and not watching on YouTube, you can see an example of my family’s budget in the article version at finances.mddecisions.org

Our budget at home has different sections. We organize expenses by categories. And we separate my wife's expenses, my daughter's expenses, my expenses and our home expenses. Then we have columns for what I will pay, and for what my wife will pay. This allows us to understand not only what we are spending but also where the money to pay it is coming from.

Then, we separate expenses into two categories: fixed and variable.

Fixed Expenses

These are our regular, predictable expenses. Things like mortgage, car payments and insurance for example.

Variable Expenses

This is where most of us make mistakes. You must be honest with yourself. Be realistic. One thing is an aspirational budget, and another one is a real one.

For example, suppose you expect to spend $100 going out for dinner and drinks once a week. Is that really what you spend? What about the tip? What about transportation? If you consistently spend $140 instead, you are budgeting for what you would like to spend, not for what you truly spend. And if this part of your budget is off, it will destabilize other parts. I prefer to slightly overestimate to give myself some wiggle room.

The same principle applies to medical expenses. If you expect to have copayments throughout the year, calculate approximately how much you might spend and divide it into twelve months. Save it and don’t use it for any other purpose. That way, an occasional medical expense doesn’t become an unexpected financial problem. But that is different than an emergency expense, which we will talk about later.

Now, if you end up spending less in medical expenses at the end of the year, good for you. You can invest it or save it. If you end up spending more, you adjust it in the following year’s budget.

Organizing Your Budget Around Your Paychecks

I organize my expenses according to when I get paid. If you are paid twice a month, create a column identifying when you will be paying each bill. On the first or the fifteenth of each month. That way you will have enough to avoid late payments.

Credit Cards and Student Loans

For credit cards, I recommend setting up a specific amount rather than paying just the minimum. Try not to drag them for too long.

You can see in the article or YouTube that we also have a debt tracker in our budget to know how much is owed and when, with the specifics of each debt.

Investments Should Not Be What Is Left Over

Investments should not depend on whatever money happens to be left after you pay your debts. Because, let’s be honest, then you will never have enough money to invest. The more you make, the more you will spend. Invest consistently, according to your financial circumstances. But once you invest, assume this money doesn’t exist. That is what I do. That discipline makes an enormous difference.

Emergency Funds and Future Expenses

How much to save for emergencies depends on your circumstances. I can’t tell you how much that would be. I recommend saving enough to cover several months of essential living expenses in case of an emergency. This money should remain readily available, whether you put it in a savings account or an investing account with low risk.

Don't Forget Your Subscriptions

Amazon, Hulu, streaming services and whatever other application you may have, come with a price. You may not even remember these subscriptions, but they can quietly undermine your financial plan. $20 a month doesn’t sound like a lot but, multiply it for 12 months. $240 a year could represent a monthly credit card payment.

A Budget Is Not a Static Document

Your budget is not something you make once and you forget about it. It needs to be adjusted. I adjust my budget monthly. I don't change it. I adjust it. There is a difference. If one month I have an additional expense, I use my piggybank. You don’t need to keep a large amount in your piggybank. Just enough to allow some wiggle room. If your budget is too restrictive you will eventually abandon it.

Budgeting and your Financial Plan

A budget is not the same thing as a financial plan. Your financial plan is the bigger plan toward your financial goal. Your budget is one of the tools to achieve that plan. The two should be aligned.

If your goal is to become financially independent, then that priority should be reflected in your budget.

The Bottom Line

You don't need a lot of money or sophisticated financial software for a good budget. You need consistency and discipline. Something that as doctors we know a lot about.

Your first budget won’t be perfect. Your budget will evolve with you. Always with your financial goal in mind.

One of the reasons I like budgeting is because it saved me from making even bigger financial mistakes than I once made. And believe me, you will make mistakes too. We all do. But if you stay on course, budgeting will help you navigate the stormy waters towards wealth.

Three Takeaways

Start budgeting as soon as you can

Be real. Aspirational budgets are much different than realistic ones.

Budgets must adjust to life. Not change. Adjust

“Wealth consists not in having great possessions, but in having few wants.”

Epictetus

MD&D Quote of the Day

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