Conventional approaches to budgeting may not always suit doctors’ financial situations. This guide presents a practical approach to managing your money, allowing you to prioritize spending on necessities, luxury indulgences, and investments.

Going beyond the budget

Popular budgeting methods include the 50/30/20, zero-based, and envelope budgets. All these techniques have merits, and following financial rules of thumb is a good way to get a handle on your spending.

At Earned, we suggest a unique approach to spending for doctors. Adopting this approach is beneficial when starting your career, and it is even more effective when focusing on wealth-building. You can use this framework to organize your spending into categories, which we have based on guidelines from the Research Foundation of CFA Institute.

Note: When discussing spending, we refer to after-tax money or cash, which differs from income. Income includes salary, dividends, and interest, which are taxed.

A framework for spending

Divide your spending into the following five categories:

1. Basic necessities

As with any budget, the first bucket of spending includes necessities like housing, utilities, transportation, medical coverage, insurance, food, and basic clothing.

Your biggest expenses usually fall into this category. These 'fixed' expenses make up the largest portion of your budget and impact your ability to change your lifestyle in the future. Even for housing, there is a difference between purchasing a more basic house versus a luxurious one.  Nearly 20% of doctors reported having a mortgage that exceeds $500,000, with 8%-13% of doctors reporting owning a home larger than 5,000 square feet.   At Earned, we recommend that our doctors clients spend no more than 30% of their gross income on housing, for example.

2. Lifestyle maintenance

This is a more subjective category, which includes expenses necessary to maintain the standard of living you and your family are accustomed to. This category features the ongoing cost of children's education, child care, family vacations, and other discretionary expenses such as entertainment, and dining out.

3. Luxury consumption

Doctors work hard and deserve to enjoy the fruits of their labor. This category accounts for spending on indulgences, such as luxury travel, luxury clothes, furnishings, etc.

To understand the nuances among 'necessities,' 'lifestyle maintenance' and 'luxury consumption,' consider this example of money spent on food and home, and how to categorize them using the framework we suggest:

The exercise of labeling your spending helps you see where you can make adjustments and free up money when you need it.

4. Noninvestment assets (purchased for consumption rather than investment)

Real estate is a popular investment vehicle for doctors. However, there are assets that you own that fall into “noninvestment assets”, which are purchased for the primary purposes of consumption rather than investment.  For example: a second home, art, antiques, a private yacht, a private airplane, etc.

5. Savings and investments

Finally, this is the category for all the money put toward your nest eggs. This includes cash in bank accounts, retirement accounts, employee stock and options, pensions, life insurance, stocks, bonds, and alternative investments. Earned encourages doctors to implement a retirement strategy that adjusts withdrawals based on financial circumstances and market changes.

How to think about major expenses

When it comes to big expenses, it's important to choose carefully and do a full analysis of total potential costs because they often turn into fixed costs that are not easy to change later.  

Major expenses like buying a home, education, and transportation can have a lasting impact on your finances. For example:

• Your primary home comes with ongoing costs like mortgage payments, property taxes, insurance, and maintenance, which are usually tied to how expensive the house is.
• Education costs can also add up quickly, especially if you choose private schools over public ones, considering the number of children you have and the 13 to 17 years they'll spend in school.
• Transportation expenses, including car payments, insurance, maintenance, and fuel or electric vehicle charging, can also be significant and are often underestimated.

Because these costs can be substantial and long-term, with high switching costs, it's essential to think them through to avoid financial stress later.

How to handle lifestyle creep

Doctors are not immune to lifestyle creep, the habit of upgrading your lifestyle as your income increases. Avoiding lifestyle creep is easier when you follow a spending framework, and create a budget you regularly revisit as your life changes.

When making high-cost purchases, it's important to weigh immediate satisfaction versus the potential gains from investing the same money. Similar to the decision framework a patient would use to pick a medical procedure, ask yourself the following questions:

• What are the short-term and long-term benefits of spending this money?
• What are the potential drawbacks of making this purchase?
• What are my practical alternatives?

Being mindful of these trade-offs can help you achieve a balance between enjoying your lifestyle and securing long-term financial health.

At Earned, we provide comprehensive wealth management for doctors, including helping to build budgets through our financial planning process that help achieve doctors’ long term financial goals. This work includes helping to evaluate the impact of major purchases on their financial plan.  Earned believes that smart budgeting is a key determinant of achieving financial independence. Our services span fiduciary financial planning to investing, tax planning, estate plan reviews, insurance solutions, career advisory services, and more.