Why Residents and Early Attendings Need to Budget

Whether you’ve finally reached an attending physician salary or are still getting by on your resident salary, it’s only human to want to splurge a little. But before you throw your residency budget out the window, it’s important to realize that no matter your salary, without a budget it’s easy to miss your financial goals.

Lifestyle inflation is the silent killer of doctors’ retirement dreams and student loan payoff goals. With the cost (in time, money and tears) that it takes to reach attending status, it’s important to figure out the best way to manage your student loan debt while building your wealth. Adapting or even maintaining your existing budget can be key to avoiding overspending and living within your means.

Keep in mind: it’s much easier to avoid spending more now than it is to cut back later.

Why physicians have unique budgeting needs compared to other high-earners

With four years of medical school following undergraduate school and another three to seven years reserved for residency and potential fellowship programs, it can take more than a decade to become a full-fledged attending. That means doctors are typically joining the workforce quite a bit later than other professionals. These shortened career timelines mean less time to earn money and meet financial goals like saving up for kids’ college educations, supporting aging parents, or retiring in style.

Doctors also are typically dealing with a lot more student loan debt than their peers — even peers who also pursued post-grad education. The average cumulative amount owed by medical students was $241,600 in 2015-16, according to the National Center for Education Studies. By comparison, the average Ph.D. student owed less than half of that amount. Paying off such large student loan debt can keep you in a financial hole for a decade or more if it’s not tackled aggressively.

As you can anticipate when your pay is expected to jump from the mid-five figures to a six-figure annual salary, rather than planning ahead for how to spend it all, a wise resident can plan ahead to avoid overspending.

How to build a physician’s budget

Budgeting in the medical field isn’t all that different from budgeting in any other area of work at its core. Regardless of your profession, one of the first things you’ll want to do when creating a budget is figure out your priorities.

Next, you’ll need to calculate what you’re spending. As a physician, you’re likely to have more non-negotiable items on your monthly expenses, including disability insurance and term life insurance, on top of significant student loans. Routine but optional spending like subscription services and dining out should be organized in a different bucket.

By comparing your income to your expenses, you can see how much you’re saving and if those savings are meeting your short-term and long-term goals. Looking at your neatly organized list of expenses, you’ll want to figure out where you can save and come up with a monthly savings goal, identify a monthly spending cap, and monitor and tweak as needed.

Don’t stop living like a resident just yet

If you’re already an attending, you may be eager to take that new six-figure salary and immediately spring for the house or car of your dreams. If you’re a resident, you’ve no doubt thought about how much different it will be when you land that first attending job. However, maintaining your finances as if you’re still a resident can help you slowly make improvements to your quality of life.

Keep doing what you’re doing financially, but use the difference between your salary as an attending physician and resident to pay off your student loans quickly and start saving. Otherwise, you could drag this process on for another decade and wind up paying a lot more interest on your loans.

Types of budgeting strategies

There’s no one-size-fits-all to creating a budget. The best budget is the one you stick to.

If you’re really old school, you may find that writing everything down with a pencil and paper works for you. If you misplace your notebook, though, you’ll have to start completely fresh. If you’re a more high-tech budgeter, you might prefer tracking spending with an app. And somewhere in the middle are the self-made spreadsheet users. The spreadsheet approach leaves plenty of room to customize your needs, but that’ll require more work because you’re working with a blank slate.

What is the 50/30/20 budget rule?

The 50/30/20 budget rule is one of the most easy-to-follow budgeting strategies. This common rule breaks down your monthly take-home pay by needs, wants, and savings.

Your necessities, like housing and food, get the biggest chunk with half of your pay. Your wants, like going out to a show or upgrading your TV, get 30% of your pay. And the last 20% goes toward extra debt repayment, retirement contributions, and other savings. This last chunk is what can keep you from falling into the trap of lifestyle inflation. Building debt repayment and savings into your budget means that money already has a designation, leaving you less likely to unintentionally spend it.

If the 50/30/20 budget rule isn’t working for you, consider the three-category budget. Rather than tracking every single dollar you spend, identify the areas you’re most likely to overspend in, and focus your efforts to cut back there. Whether you have an online shopping habit, order takeout every night, or always need the latest device, you can probably find a few areas where you can minimize spending.

Make budgeting rewarding with goals

Sticking to a budget can be difficult. If all of your goals are long-term goals, it can be difficult to see the “wins,” but if you give yourself short-term goals, you can help motivate yourself to save.

For example, maybe your first goal is to build up an emergency fund of three to six months’ worth of necessary expenses. You might be able to accomplish this in a year or two. But if your first goal is saving for a 20% down payment on a house (especially a dream home), that may take a longer, which could be discouraging.

Budgeting on a family level

Budgeting for yourself is one thing, but when you bring a spouse and/or children into the picture that changes things. If you and your spouse share bank accounts or credit cards, you’ll likely want to share a budget. That doesn’t mean you can’t account for your individual spending, but you’ll likely want to have a separate checking account and/or credit card designated for yourself.

Childcare, allowances, and how much “fun money” to spend on enrichment opportunities for your child is also vital to factor into your budget, and an active, ongoing conversation to have with your spouse as your child grows up. You also may consider adding a new savings category for college funds.

Perform a regular spending audit

Taking a regular look at your overall spending can help you stay on track with your financial goals. This doesn’t need to be something you do weekly or monthly once your budget is healthy, but it’s still a good habit to annually or twice annually thoroughly review your credit card and bank statements to clean up any errors, see where you can negotiate better deals, and evaluate whether you need to reassess your budget.

One way to evaluate your spending is to take a page out of Marie Kondo’s book and ask yourself if each of your nonessential purchases “sparks joy.” Does adding that candy bar every time you check out at the grocery store add value to your life? Maybe you can consider eliminating it — or maybe it really is a highlight of your day. The key is to be aware of what spending is valuable to you.

How different doctors can use individual financial goals to approach budgeting

Having a budget can help you work toward your financial goals. But not everyone has the same financial goals.

For instance, say Dr. Adams is aiming to retire early, while Dr. Bernstein is focused on traveling, and Dr. Chen is determined to make sure her children are set up for college.

Let’s say each doctor is working with the same annual income, $300,000, and is 30 years old at the present day.

• Dr. Adams likely would want to take advantage of any pre-tax benefits by putting as much as possible toward a 401(k) or Roth IRA. Dr. Adams wants to retire at 60. If she is starting with a 401(k) balance of $1,000 and plans to contribute 6.5% of her salary to hit the IRS maximum contribution ($19,500 for 2020) and has a 50% employer match up to 6%, with an expected salary increase (3%), expected annual return rate (6%), and expected inflation rate (3%) taken into account, she would have a balance of more than $3.2 million at retirement age. Experts generally recommend saving at least 10 times your annual salary for retirement, so Dr. Adams would be meeting that threshold.
• For Dr. Bernstein, who’s prioritizing travel, perhaps he’s not putting as much toward retirement. Instead of the 6.5% that Dr. Adams is putting toward a 401(k), Dr. Bernstein is only putting 3% toward a 401(k). If everything else stays the same, he would need to work until 70 to reach the roughly $3.2 million mark. But he could put the money that he’s not putting toward retirement toward travel. If after taxes and his 401(k) contribution he’s working with $200,000 and wants to put 10% toward travel, he’d have $20,000 a year for travel.
• If Dr. Chen has two children and wants to make sure she’s able to cover the costs for each of them to attend a public four-year college with in-state tuition, she would likely need to set aside at least $100,000 per child. Say her children are 2 and 4, respectively, and she expects them to enter college at 18. Therefore, she wants to have the $200,000 put away by the time her oldest child turns 18. She would need to save almost $14,300 per year to meet that goal. If Dr. Chen follows the same retirement structure as Dr. Bernstein and also has $200,000 to work with after taxes and retirement savings, she would have to factor a little over 7% per year for college savings.

When to seek guidance from a financial advisor

If you’re having trouble committing to a budget on your own, you may want to consider professional assistance from a financial advisor.

If you’re just looking to develop a simple financial plan or need help with a specific area, you may only need a one-time consultation. You can also turn to a financial advisor because of a particular life event like marriage, divorce, or approaching retirement age.