Close your eyes, take a deep breath, and think about the word “budget”. Chances are that word brings more cringe than a positive, reassuring feeling.
Creating a budget brings up more questions than answers. It’s one of those areas that most physicians struggle with. The reason is that most of the traditional budgeting lessons and methods lack the freedom to adjust things and they often don’t have space to fit in your personal aspirations and goals. Such budgets miss the point of why you’re working so hard.
What makes budgeting for a physician so different?
When you start your career, cash flow gets a lot more interesting. You may have a good income coming in but you’ll also have big expenses to cater to such as loans. There is a lot of money being earned and spent that you often miss out on accommodating your personal expenses.
Taxes are also significant expenses and smaller expenses such as telephone bills can mount up to great expenses over time. This is where not having a clear road map (a budget in this case) can make it extremely difficult for you to manage your finances.
This article highlights five simple steps to create a budget that is made specifically for you and your needs as a physician. It will give you enough room for modifications as you go by the year both personally and professionally.
5 Steps To Creating A Great Budget
Step 1: Decide your Goals
Before you start making any plan, you need to have clear, specific, and time-bound goals in place. Most physicians often skip this step but it’s crucial that you know what it is that you want to achieve and when, to make a good budget.
There are two ways of deciding your goals:
These are goals that are limited to 6 months to a year. For example, clearing a loan, paying off any personal debts or bills, buying a piece of expensive equipment, or maybe hiring more staff. It could also be as simple as taking home a little more than you usually would.
These goals take time and can go up to 2 to 5 years. This could be paying off a loan, being able to take a sabbatical and go galavanting around the world, prepare a retirement fund so you can retire early. These are goals that you know won’t happen overnight and will require some planning.
How you set your goals is entirely up to you but knowing what you’re working for can be a great motivator. When it comes to setting goals, there is no right or wrong. It entirely depends on your aspirations but make sure that you make your goals as specific as possible. For example, within six months of starting my medical practice, I will redecorate the waiting area.
Step 2: Review and Analyze
Here’s what you do once you have your goals in place.
Review your expenses
Before you put any restrictions, first understand where you stand. This involves writing down all the items you spend money on–from your daily Starbucks to your monthly subscriptions. Keep a track of all your expenses and spend as you would on a normal day without holding back. Also, keep a record of all the money that you’re making–be it from your primary business or from a side income.
To do this, you can use an app, software, or a simple and straightforward spreadsheet. Focus on getting all the information down so that you can review real-time data when you sit down to plan your budget.
Once you have this in place, group your expenses into different categories such as bills, EMIs, salary, rent, entertainment, and more. Avoid leaving out things that you’re unsure of. Having clearly defined categories will help you ensure that every penny is accounted for.
Analyze your expenses
Once you have all the categories in place, you need to compare the money you’re spending in each and how that category is aligned with your goals. For example, your goal could be to buy a piece of new equipment for your medical practice but you’ll realize that instead of saving money on the side for it, you’re spending more on entertainment and eating out.
Or maybe you’re spending way too much on coffee when you could be paying off your bills and debts. Having this data in front of you will help you understand your habits and see what is keeping you from achieving your goals.
Step 3: Create a budget
Once you have the raw data in place, it’s time to put a plan on how to make changes to ensure you achieve your goals. Depending on your expenses, your income needs to be divided into three categories:
A specific percentage towards your fixed and important expenses – these include EMIs, rent, subscriptions, utility bills, insurance premiums, and more.
A specific percentage towards your variable expenses – these involve eating out, shopping, entertainment, and more. These are areas that you’re not sure how much you will spend on.
A specific percentage in savings – this involves paying off any loans, investing your money, putting it in a retirement fund, or putting it in a savings account for rainy days.
Once you have identified your fixed expenses, you need to find the items that you can change. Maybe you’re paying too much rent by living in a specific area and by changing houses, you could save that extra money and put it aside to be able to buy the software that can make your administrative work way more efficient which is a lot more important for you.
The objective is to look at your expenses and find areas where you can save more by being more efficient and smart. Implementing these changes in every category can give you more freedom to spend better in the future.
Implementing these practices can be challenging but by identifying these bits, you can create a budget that works for you on a personal and professional level.
Step 4: Set up individual accounts
One of the best ways you can stick to your budget is to create three separate accounts to manage the three categories of your budget.
Set up a checking account for all your fixed expense
s that you know you can’t avoid. Automate this process so that every month a particular amount goes towards the specific expenses without you having to lift a finger. This will not only save you precious time but you’ll also never miss a payment.
Set up an account for your variable expenses where you keep a certain amount so that you reduce the chances of overspending. This can go towards dining out, movies, shopping, vacations, and more.
Set up an account when a fixed amount of your total income goes into saving. Make sure that you never see this money so there is no temptation of spending it. Automate this process so that you know that you will hit your goal.
Step 5: Use tools to make this process more efficient
There are a dime and dozen budgeting tools available today that can help you form budgets for your daily, monthly, and yearly spending. These tools monitor your expenses and share tips and tricks on how you can better optimize your budget to achieve your goals.
These tools help you put all the information in one place and make it easy for you to access and understand all the information. You can edit categories, customize your budget, and ensure that it is personalized to your vision.
Build an efficient budget
You may have built a budget in the past only to realize that it’s not easy to stick with it. Often the reason behind it is because you’ve made it keeping only your professional life in mind and have completely ignored the personal aspect. By including your personal goals and aspirations in your budget, you can create a framework that works for you.
For more tips on how to handle and plan for your future check out our wealth management guide.