How to Turn the Typical Physician Budget into a Path to Financial Independence

It’s time for doctors to change their reputation for being bad with money.

Now, I know of many physicians are good with money. For example, my dad is a doctor and has always been a great saver. If I’m being honest, it’s probably mostly my mom’s good influence though.

In all seriousness, I’ve seen a trend that medical school debt has led newer physicians to be much more responsible with money than their more senior colleagues. Where doctors get into trouble is when they feel like they earn enough money that they don’t need to worry about their spending habits.

Why focus on spending though? Do physicians really need to worry about their financial future with a secure, high income? Yes. Here’s why.

Why budgeting and savings rates are important for physicians

Savings rate — how much you have left over at the end of the month after what comes in and what is spent — is the No. 1 predictor of financial independence (FI). It’s actually much more predictive of FI than income. Here’s what I mean.

Two couples, Daniel and Dana and Cam and April, are investing $2,500 per month, which is equal to $30,000 per year.

There is a difference between these two couples though. Daniel and Dana are earning $300,000, saving 10% of their income, while Cam and April make $125,000, saving 20% of their income. If both couples earn an average rate of return of 7% per year, each couple would have about $2,500,000 in 30 years. Sounds like a good amount of money right? Well, that depends.

To reach FI, a physician needs to have about 25 times their annual spending in order to live on their nest egg with a low risk of running out of money.

Let’s say that Daniel and Dana are spending $250,000 per year. They need a nest egg of $6,250,000 to reach FI. At “only” $2,500,000, they’re $3,750,000 short — only 40% of the way there — after working for 30 years. Looks like they’ll have to keep working for another 12 years to become financially independent.

Cam and April are spending $100,000. They have 25 times that amount in their nest egg and are ready to retire comfortably despite earning half the income of Daniel and Dana.

If Daniel and Dana were better at tracking their spending and budgeting, they wouldn’t have to work for 42 years to reach FI.

In fact, doctors are in an amazing position to have a super high savings rate while still living a high quality of life.

Trading time for money

Student Loan Planner®’s founder, Travis Hornsby, talks about the concept of trading time for money as a way to frame spending decisions. He discusses it in the SLP podcast from 1/14/2020. Have you ever thought about how much time you have to work in order to pay for something?

Imagine a physician is taking home $15,000 per month. They buy a $60,000 car because they think an $800 monthly car payment is manageable. Framing it in the context of their income, they just spend four months of their take-home pay for the car. That may be worth it because they love cars. On the other hand, it might make them take pause and get a $30,000 car instead.

Another thing Hornsby mentions is to think about spending in terms of FI. If a doctor wants to buy a new $60,000 car every three years, they’d need 25 times that, or $500,000, in their nest egg just to support the ability to buy that car. To get there, they need to save an extra $1,000 per month for 20 years earning a 7% annual return in order to grow a nest egg to support their car-purchasing habit alone.

Example of a typical doctor budget

Doctors earn great salaries but after putting all the years of stressful training, some feel like the time has come to indulge in luxuries. It’s also a psychological challenge because they’re going from making $60,000 in residency and scraping by while working long hours to earning $250,000 as an attending physician. The income increase feels like winning the lottery. The money feels infinite, but it’s not.

Jessica, for example, is a primary care physician who has been an attending for three years. She’s on the PAYE plan for Public Service Loan Forgiveness with four more years to go and is married with 2 kids.

She’s making $250,000 and maxing out her 403(b) at $1,625 per month, leaving them with a monthly take-home pay of around $12,000.

The following table is an example of what most doctors do with their budget. Income quadruples from residency to attending status, and their expenses jump by the same factor. In this case, Jessica’s take-home pay is identical to her expenses, meaning she could end up living paycheck to paycheck despite her high salary:

Cost	Amount
Housing (payment, utilities and taxes)	$4,000
Student loan payment	$1,700
Kids	$1,500
Food	$1,400
Shopping	$1,000
Cars (payment, insurance and gas)	$1,000
Travel	$700
Cell phone, internet and streaming	$500
Misc.	$200

Most doctors feel good about maxing out their retirement plan. It seems pretty good to be saving close to $20,000 a year, but it’s not enough. That only works out to an 8% savings rate on a $250,000 salary.

Once her loans are forgiven, her $1,700 payment will go away. If she treats it like a “raise” and starts spending an extra $1,700 per month, financial independence is close to 50 years away for her, and her kids are in danger of having to take out student loans too.

The problem for most doctors is that they do what Jessica did. They lock themselves into large fixed expenses with very little wiggle room and have trouble adjusting their lifestyles down when they realize they want to save more money or that they’re having trouble making their student loan payments.

How doctors can budget to afford their student loan payments and more

Looking at Jessica’s budget as a hypothetical example, there are a lot of high expenses there. Housing, kids, cars and student loan payments total $8,200 a month. That’s nearly 70% of her monthly outlay.

One thing she can do after getting PSLF is take that $1,700 and start saving it rather than spending it.

As far as what she can do immediately, there are two approaches she could take to improve her finances:

1. Slash spending like crazy: Sell the house and cars and then re-examine the child care situation and cut spending by about $5,000 per month. I’m a big believer that people don’t make drastic changes unless they have a drastic event in their life. Although this would put her in a very strong financial position to get to financial independence, the reality is that change is hard for people unless they’re in dire straights. She’s not in a great position, but she’s not feeling enough pain to make drastic cuts and uproot her family.

I do believe that people can change and improve over time, but it’s slow and steady. Incremental change ends up being the most sustainable change, which brings up option No. 2.

2. Cut back on the flexible expenses: The second thing Jessica could do is probably more realistic and provide her with instant results. Keep the house, cars and kids situation stable but look at cutting back on the other $3,800 of expenses — food, shopping, travel, etc. — and see if she can cut $1,500 from that portion of her budget, reducing it to $2,300 a month. That extra $1,500 plus the $1,625 in retirement works out to a 15% savings rate. She has four more years until getting PSLF, so when that happens, she’ll have another $1,700 of spending that will go away, which will increase her savings rate to over 20%.

Now we’re talking!

Let’s take a look at her current budget (MAX) versus option No. 1, downsizing (SLASH), versus option No. 2, cutting back on the flexible expenses (MIDDLE), and how these options change the speed at which she reaches financial independence. These scenarios assume that she gets 3% raises each year and stays at the current savings rate.

Total spending

Category	Max	Middle	Slash
Housing (all costs)	$4,000	$3,800	$1,500
Kids	$1,500	$1,200	$800
Food	$1,400	$1,000	$800
Shopping	$1,000	$700	$500
Cars (payment, insurance and gas)	$1,000	$1,000	$600
Travel	$700	$700	$300
Cell phone, internet and streaming	$500	$400	$400
Misc.	$200	$200	$200
Total spending	$10,300	$8,800	$5,100

Student loan payment and savings

Category	Max	Middle	Slash
Student loan payment	$1,700	$1,700	$1,700
Retirement plan max	$1,625	$1,625	$1,625
Other savings	$0	$1,500	$5,200
Savings + debt payment	$3,325	$4,825	$8,525

Savings rate and years to FI

Category	Max	Middle	Slash
Savings rate	16%	23%	41%
Years to financial independence	29	20	11

In this comparison, Jessica would need to work for 29 years in her current situation to reach FI. In the “slashing spending” scenario, FI comes 18 years sooner not only because of the higher savings rate but also because of the lower expenses.

I’ll be honest here and say that most people won’t be able to do that unless they’ve just absolutely had it. Most people would go for the No. 2 option. It would be great to reach FI almost a decade sooner without making drastic changes.

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Rob Bertman’s 50/50 rule to boost savings rate

The best way to avoid locking into major purchases is to use this is a little trick my wife and I use. By the way, this works great when transitioning from residency to being an attending.

When getting a raise, bonus, tax refund, etc., many people will spend it all. I like to make the joke that when people get a $20,000 bonus, they end up spending $25,000. Funny, but also not funny.

Here’s how my 50/50 rule works: Let’s say that Jessica gets a $20,000 raise, which increases her monthly take-home pay by $1,000 per month. She should add least $500 of that (50% of the increase) to the amount she’s currently saving. If she’s saving $2,000 per month, then she should increase her savings habit to $2,500 per month.

Then, she can feel free to spend the other $500. That’s $6,000 of extra spending and savings. That could mean an extra family trip to Disney World … well, almost.

The same thing applies to expenses that get reduced or go away, such as early childhood tuition and other debt payments as the debts are paid off, like credit cards and private student loans.

Using this rule, 50% of their income is the minimum a doctor should save. Some people feel like they’re already living the lifestyle they want. If that’s the case, save the full amount of the raise or expense reduction each month.

The 50/50 rule would not only enable Jessica to save more money each year, but she’d also increase her savings rate, which would get her to financial independence even faster. Plus, she can increase the spending portion of her budget.

How physicians can set up a smart budget

Physicians can follow these steps to improve their budgets and get closer to achieving FI. These steps combine small and big changes that can be implemented at a pace that works for you.

Step 1: Understand your total monthly spending over the last 3 to 6 months.

Many people I work with on their budgets wildly underestimate how much they spend. Sometimes, they’re off by $2,000 to $3,000 per month! Get a handle on your total monthly expenditures. It’s the best way to fully understand the changes that need to be made.

Step 2: Take a look at how much you’re spending in each category before setting up a budget.

Skipping this step makes budgeting extremely difficult. Oftentimes, people just pull a number out of the air and say that’s what they should be spending in that category. For example, I’ve seen people set a $200 per month clothing budget without knowing that they’re spending closer to $600 per month.

If we don’t understand where our money is going in the first place, we don’t know the new choices we need to make and what our baseline spending even is.

Step 3: Identify where you can easily cut your spending without feeling like you’re making a huge sacrifice.

Get some easy victories under your belt. Go through your spending and find the things you don’t use or you don’t get any value from, like a streaming service you don’t use or a restaurant or store you frequent but don’t actually like.

Cut these out of your spending. You won’t miss them and you’ll automatically save more money.

Step 4: Pick 1 or 2 spending categories that you will work on reducing. That’s all.

A common mistake I see people make is that they track spending in all areas. All that does is burden you with unnecessary information that can make it harder to change. Why do you need to look at your rent or mortgage budget every month? It won’t change unless you move.

Find the one area of your life where you want to cut back and track only that spending until you get to your goal number.

Step 5: This is super important — do it together!

If you have a spouse or partner who you share expenses with, it is absolutely critical that you do your budgeting together. Nothing is more frustrating than expecting a partner or spouse to make spending changes when the data isn’t shared with them and they’re not aware or involved in the decision-making.

Working together gives couples accountability and a team-oriented approach to becoming successful in their budgeting.

Physicians can afford their student loan payments and save money at the same time

Think of spending like tracking the vitals of a patient who was admitted to the hospital. They need to be monitored closely, and adjustments need to be made if there are any irregularities.

Be vigilant about taking on fixed expenses like housing and car payments. These can be the financial downfall of many doctors. Rather than looking at the monthly payments, look at the total cost of the purchase and compare it to your income. Then ask yourself, “How much time are you trading to make that purchase?”

Doctors earn nice incomes. You should be able to afford to pay back your loans and retire early. Regardless of your student loan plan, a good portion of income should be dedicated to either paying off student loans aggressively or saving aggressively, alongside going for loan forgiveness, until you are done paying off the loans.

Physicians who focus on increasing their savings rate can win with money. It’s the dynamic duo of high income and a high savings rate that leads to financial independence. A baseline savings rate should be 20%, but physicians who can save into the 30% range are a slam dunk to reach financial independence more quickly.

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