How Doctors Can Build Better Budgets

Now that we have moved past our introductions, understanding the nuances of the ‘Doctor’s Dilemma‘ and how to set realistic goals, now let us begin to better understand our money. The cornerstone of every financially secure physician is an honest and transparent budget. How can you possibly reach your personal and financial goals without understanding exactly operating an effective budget? 

Everyone, doctors included, needs to understand where their money is coming from and where it is going. I have spent a lot of time writing about budgeting, and with this post, I hope to formally create a digestible compendium of what goes into a budget and why it matters.  From our ongoing content series Doctor Money: A Personal Finance Guide for Physicians, here is Chapter 3: How Doctors Can Build Better Budgets.  

Doctor Money: A Personal Finance Guide for Physicians

Previous Chapter:

Chapter 2: Set Realistic Goals

Chapter 3: How to Build a Budget

Ahh, budgeting. Just the mention alone makes many people nauseous.  However, this should not be the case. True, not everyone has a passion for personal or physician finance, but you should have a passion for understanding your money. 

A comprehensive, transparent, and organized budget can unlock a significant understanding of where your money is going, how much you spend on certain categories, where potential financial ‘pain points’ may reside, and how to optimize your expenses better. What is even better is that once you take the time to build a budget like this, you will never have to do it again. Aside from small adjustments and updates, you will create a framework you can build upon indefinitely. How great is that? All you need to do is take the time once to devote to building a budget, and you will reap the rewards for years to come. 

One last point: remember that budgeting does not always have to be this laborious a task. Creating a budget in Microsoft Excel was great for someone who is incredibly detail-oriented. I could control each variable, build certain equations and algorithms, and create graphs. This allowed me to have as much information as I wanted, but this may not be for everyone. As we will touch on later, remember that there are plenty of budgeting apps, other spreadsheet software tools, and even the classic pen-and-paper method.  Whether you prefer an app to do everything for you or want to individually update each expense, you will get out what you put in.

Why Does Budgeting Matter?

So, why does budgeting matter? This may seem like a ridiculous question, but if you are to truly buy into what this book hopes to achieve, this is critical to your understanding. Why should a doctor budget? Physicians make great incomes, substantially over the median U.S. household income, commonly in the top 10% or even 5% of incomes in the U.S., so why bother? If doctors make so much, then surely they don’t need to pay much attention to their money.  

Here is where you are wrong. If you read Chapter 1: The Doctor’s Dilemma, you would understand why doctors should budget. Though physicians make substantial incomes, it is often overshadowed by colossal student debt, poor financial understanding, and a need to inflate their lifestyle to match societal and personal expectations. With all these combined, physicians commonly live paycheck to paycheck despite making large six-figure incomes. This creates a dependency on their jobs just to maintain their lifestyle. This is where the term ‘golden handcuffs’ comes from. Physicians are shackled to their high-paying careers to maintain their expensive lifestyles. However, if ‘something gives,’ like unemployment, divorce, or disability, then their lifestyles quickly become unsustainable and can lead to catastrophic financial implications. 

Budgeting is one of the best tools we have to combat this. Though it may seem simplistic, the act alone of creating a budget, individually entering your income and expenses, and creating categories can help physicians better understand the complex network of expenses that are woven into our everyday lives. Through this, we can understand our ‘fixed expenses’, our biggest expenses, where we may be over- or under-spending, and where flexibility may lie. 

Budgeting is arguably one of the most important steps in paving the way for financial prosperity. Use the tips and tricks below to build a budget reflecting your financial home. 

Income

First and foremost, our budget should start with understanding our income. This is all the money coming into our budget. This should include all money readily used to meet your day-to-day expenses. This constitutes your primary income, spouse’s income if you are a dual-income household, and any secondary income. Let’s explore what falls into each of these categories a little more.

Primary Income

Primary income is your largest source of regular reimbursement. For physicians, this is your salary or your monthly or biweekly income, depending on the cadence you get paid. For an honest budget, this income should be entered after taxes (i.e., your take-home pay). The money you spend each month is your after-tax income or net pay. 

Spousal Income

Spousal income is no different. This would be the primary income of a working spouse. Again, I recommend using the after-tax income or net pay for this portion. 

Secondary Income

Lastly, I will include any secondary income that may be generated. Whether from a side hustle or working some moonlighting time, this income should be included. I find it helpful to separate from primary income, even if it is more clinical work, because you can better understand your monthly and annual income breakdown from various revenue streams. If you are working overtime in your primary profession, then this would be primary income, but if it is reimbursed separately or is a different institution, then I would categorize this as secondary income. 

Now, let’s put all of the income sections together. Here is an example of how I create the income portion of my budgeting spreadsheet. This is taken from the FREE Budgeting Spreadsheet that I offer to anyone who subscribes to our email list!

As you can see, this is small and streamlined. It is meant to represent both spouses’ primary and secondary incomes. Further, it calculates the sum of our income each month and a running total for the year.  This is always good information to have. 

Expenses

The next and more complicated section constitutes expenses. Honestly, this section can be as simplistic or comprehensive as you are willing to make it. The more complex it is, the more time is needed to invest. However, I will say that once you invest the time to make a genuinely comprehensive budget, you only have to make small additions or subtractions to your categories as your expenses change. In my opinion, put in the work now so you don’t have to change much later.

Now, let’s talk about everything that falls under the expenses portion of your budget. 

Fixed Expenses

Sometimes, the easiest place to start as you build your budget is with expenses that largely are guaranteed monthly expenditures and are fixed. Some of the categories that come to mind include:

• Mortgage or rent
• Utilities
• Insurance premiums
• Childcare
• Student Debt payments

Recurring Expenses

Recurring expenses and fixed expenses do overlap. For example, gym memberships or streaming services are recurring expenses and can largely be fixed, but I often see these as smaller purchases. However, several categories will have recurring expenses each month. Instead of listing them individually, I figured a picture was worth a thousand words.

Combined with the income portion of the budget, here is a bigger picture of an example budget. This time, take a look at both the income and the expense portion of the budget. Take note of all the individual categories of expenses. Notice how each expense category keeps a running annual total and how each month calculates monthly net pay, monthly expenses, and expected savings (assuming you are always living below your means). 

As you can see, a comprehensive budget will give you a complete understanding of your financial household, where money is coming in, where it is going, and how much remains. Please feel free to use the example above to build your personal budget. If you need to, subscribe to our email list, and we will automatically provide you with our free budgeting spreadsheet, which is already tailor-made for you. 

Credit Card Statements

Credit card statements can be a very helpful tool when building your budget. If you do not know where to begin or how much to budget for, review your prior credit card statements.

We live in an era of credit. Overwhelmingly, the use of credit cards is so normalized they are essentially ubiquitous with spending. For those who pay their statements off in full each month, credit cards can be a resource for rewards, cash back, travel points, etc. However, for the sake of building a comprehensive budget, their use cannot be overstated.

For those building budgets for the first time, I encourage you to review your credit card statements for at least three to six months. This will allow you to build a better understanding of your variable expenses. For example, how much did you spend on groceries per month over the past six months? How much did you spend at restaurants on entertainment, travel, cabs, parking, gasoline, car maintenance, gifts… the list goes on and on. 

These credit card statements and bank statements (checking or savings accounts) can help you better understand where your money is going and how to best calculate an average monthly expense for that category as you budget. 

Budgeting Tools

Now that we have tackled the basics of a budget let’s talk briefly about how to budget. There are several approaches to budgeting available to you. Here are a few that come to mind:

Spreadsheet Budgeting

The first and most common approach is to create a budget using computer software. Microsoft Excel and Google Sheets are some of the more frequented tools I see used. Personally, I created my initial budget in Microsoft Excel. I share a version of this for FREE for anyone who subscribes to our email list. 

However, for sharing purposes, my family uses Google Sheets. Google Sheets allows my spouse and me to access our budget from anywhere (our personal computers, our phones, or logging in elsewhere) and still access our shared budget. This makes updating and maintaining our budget simple. For most who are just getting started, I encourage this method over most as it is easy, and the software is very user-friendly. 

Budgeting Apps

Next, for those wishing for an application to do the heavy lifting, there are many budgeting apps that pair with your bank and credit card accounts to make categorization seamless. Some apps are free, some have a monthly or annual subscription fee, but they largely will help you budget, save, and provide data on your expense habits. Many also make recommendations on your spending habits. 

If you wish to learn more, I have previously written an article titled The 5 Best Budgeting Apps for Doctors, and there, I recommend some of the top budgeting applications for physicians. 

Pen and Paper

Old school pen and paper is another approach. Not for the faint of heart, but if you truly like sitting down with nothing but your prior bank statements, credit card statements, and receipts and writing your budget out, then be my guest. For my colleagues who used to create handwritten flashcards for studying purses, I am sure this may prove therapeutic.  Some use grid paper; some use formalized accounting notebooks. However, no matter your choice of hard copy, make sure your handwriting is legible, and always save your budgets so you can return to them if needed.

Cash Only

The last method I will touch on is slightly more extreme. Some, however, genuinely struggle to build a budget or feel confined by the rigidity a budget provides. Equally, this can prove concerning as avoiding a budget may lead to overspending. In this situation, some use a ‘cash only’ approach. 

Put simply, this means that you withdraw enough cash to last you the month. The money you withdraw is what you have to spend, end of story. If you run out of cash, then you have exhausted your budget. Simple, but not easy. I do not recommend this; however, for individuals who have sincerely struggled to adhere to a budget, this may be the extreme measure necessary to keep you from unwanted financial problems. 

Maintaining Your Budget

Next, on our journey of building a budget, we must understand how to maintain it once it is complete. As you can see from the pictures provided above, there are categorizations for each area of expense. 

I advocate updating the budget as one of the last things you do each night before winding down. Late in the evening, or perhaps first thing in the morning for our early risers, is when no further spending has occurred. This offers a brief window to update your budget to include and reflect the prior day’s expenses. This allows you to create a brief time in the day where you can review your budget and input your expenses. 

I believe that forming a routine around the budget’s daily maintenance will make it habitual. Once your budget’s maintenance becomes habitual, it becomes part of your life. This means, on a fundamental level, each day, you are interacting and understanding the health of your budget. That way, when unexpected financial expenses arise, you will readily understand how they may impact your budget and determine if your emergency fund is necessary to avoid unwanted budgetary constraints. 

Annually, you may need to update expected monthly expenses on fixed costs, inflated products, or reimbursement changes. Your budget is a living, breathing organism that needs TLC often. Make it a habit. 

Tracking Debt

The final portion of our chapter on budgeting regards other tabs I recommend you incorporate into your budget, especially if you are using software to create a spreadsheet budget in Excel or Google Sheets. One tab I have found incredibly motivating is the ‘Debt’ section. As an example, here are all the tabs that my spouse and I keep in our household budget:

The debt section is a portion of your budget that houses all your debts. From remaining Mortgages to student loans and more, here you can quickly navigate to a section that displays the status of your remaining debts. Here is an example of what that looks like on my budget:

As you can see, I have a portion dedicated to our student loans. Further, I have calculated our remaining combined debt, and using this data, I can create a bar graph that visually represents our debt elimination progress. I have found this incredibly rewarding and motivating. It offers a more tangible way to see our progress, which is important when pursuing a goal that can take years to achieve. For those with credit card debt, mortgage debt, or other forms of loans, I would encourage you to include these debts in this section and monitor your progress. 

Tracking Net Worth

The next tab that I find highly motivating is a tab that represents your net worth. This section is slightly more complex than the debt tab but equally important. This section should list all of your assets and liabilities and, from this, calculate your net worth. For example, here would be a list of all the assets to include:

• Bank account balances (checking and savings)
• Spousal bank accounts
• Retirement accounts
• Spousal accounts
• Investment accounts
• HSAs
• Educational Savings/529 accounts
• Business accounts

Alternatively, list your liabilities as well. These may include:

• Student loans
• Credit card debt
• Remaining mortgage debt

Following the listing of your assets and liabilities, calculate your personal (household) net worth (assets – liabilities = net worth). If you wish to learn more, here is a great article from Investopedia titled Net Worth: What It Is and How to Calculate It. Understanding your net worth, and its evolution over time can be an effective motivator for driving healthy financial habits. Here is an example of what a completed net worth page might look like:

Financial Goals

Last but certainly not least is a tab dedicated to financial goals. Last week, we published Chapter 2: Setting Realistic Goals. In that chapter, we reviewed the best ways to create realistic financial goals without setting unachievable expectations.  A tab dedicated to your annual financial goals is just another avenue to keep yourself accountable and provide motivation as you reach these milestones. Examples of annual financial goals may include:

• Perform your personal and spousal Backdoor Roth IRA
• Increase disability insurance coverage
• Create a Living Will
• Save a certain amount in 529
• Max out retirement savings
• Save up for downpayment on a home
• Save up for a car
• Save for a vacation
• Eliminate a certain amount of debt

These are just a few examples, but you can see how they are catered to be annual goals, and can be modified yearly. Above was also an example of the ‘financial goals’ section of our budget and how it would be structured.

Perhaps some financial goals are recycled year after year (like debt elimination), and others are specific for that year. No matter what you plan, keeping a portion of your budget dedicated to specific goals can act as a motivator and reminder that you are prioritizing your financial future!

How Can Doctors Build Better Budgets

So, how can doctors build better budgets? Throughout this chapter, we have highlighted the nuances of physician budget building. From creating a spreadsheet to using bank and credit statements to accurately predict budgetary expectations, budgeting is another necessity for creating a solid financial foundation. 

Remember to parse out your income streams. Methodically review your fixed expenses and incorporate your bank statements and credit card statements to create a comprehensive budget that encapsulates your day-to-day expenses. Use the various budgeting tools at your disposal and tailor your method to suit you best. Further, incorporate additional sections (tabs) into your budget, including a section that monitors your debt progress, a net worth section, and financial goals. Update your budget daily, and adjust your income or expenses as life changes.

Your budget is a living and breathing entity. Nourish it with the TLC that it deserves, and you will reap the rewards for years to come. I hope you have found this chapter helpful and that it drives you to create your budget. If you are struggling with where to start, make sure to start, make sure to subscribe to our email list and receive your free Microsoft Excel budgeting spreadsheet that I have made exclusively for you! 

Thank you for reading the latest chapter in our book Doctor Money: A Personal Finance Guide for Physicians. This was Chapter 3: How Doctors Can Build Better Budgets. Tune in next week for Chapter 4: How to Write a Financial Plan. Cheers!

The Motivated M.D.

Next Chapter:

Chapter 4: How to Write a Financial Plan

Disclaimer and Limit of Liability

This post (and hopefully its eventual publication) is designed strictly to inform and entertain. I am in no way, shape, or form a financial professional, nor does this site provide formalized financial advice. I do not provide nor engage in rendering legal, accounting, or other professional services. If legal advice or other professional/expert assistance is required, then the services of an accredited professional should be sought. I am not liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.

Further, no part of this series, post, or any post on this website may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under the 1976 United States Copyright Act, without the prior written permission of the author.

Standard Disclaimer: None of the information on this website is meant as individualized financial or medical advice.  These posts may contain affiliate links.