Whether you're a new resident physician or have been in practice for years, you can benefit from the budgeting process. Creating a personal budget helps you to know where your money is going and how much you can save. Establishing a budget for your medical practice is a indispensible planning tool.
A budget is, by nature, personal to you (and your spouse or significant other, if you choose to create a household budget); there's no “one-size-fits-all” solution that works for every doctor. If you're ready to create a budget but aren't sure where to begin or what to include, follow these tips:
1. Start by cataloguing your expenses.
Make a list of every type of expense you have, big and small. We all have certain mandatory, fixed expenses every month. Things like mortgage payments, car payments, student loan payments, insurance premiums, internet, cell phones and day care expenses, etc. These generally don't vary much (if at all) from month-to-month, and are usually bills you simply must pay or there will be an intolerable consequence (such as eviction, repossessed car, etc.).
We also have discretionary expenses. Take a good look at how much money you spend every month on things like entertainment, dining out and impulse purchases. You might be surprised to see how much you spend on food or clothes. When you're looking for ways to trim your budget, there’s a good chance you can find ways to cut back on some discretionary expenses without feeling deprived.
It may also be possible to lower some of your fixed expenses. For example, you might increase the deductible on your auto insurance, or shopping for a lower cost cell phone plan. You might also explore ways to lower your debt payments (but not in a way that works against you in the long-term).
If you are able to lower your expenses you'll have more money to set aside for future goals. Your financial planner can help you evaluate your spending, and where there may be opportunities to increase savings.
2. Pay yourself first.
Most financial planning professionals agree on this simple rule when it comes to saving: set aside your retirement savings first (more is better). When you view retirement savings as a mandatory expense rather than as something optional, you will save money consistently, month after month, year after year. To accomplish this, have your retirement savings deducted directly from your paycheck. By doing so, you're much more likely to actually accumulate what you need to meet your retirement lifestyle goals.
If you've maxed out your retirement plan contributions, can meet your other expenses and still have money left over, talk to your financial professional about automatic investing to help you reach other financial goals. For example, if paying for your children’s college is in your future, there’s a good chance you can automatically transfer money from your paycheck to one or more 529 Plans. Setting aside money for retirement, your kids’ educations or other big-ticket items can be less painful when you treat saving as a required expense every month.
3. Compare your expenses to your income.
Assuming your income exceeds your mandatory expenses (including savings) plus a reasonable level of discretionary spending, you will have additional expendable income at the end of the month to put toward savings and other goals. Creating a budget can help you identify how much you should be able to save, and tweaks you can make to save more. If your income does not exceed your expenses, you’ll need to figure out where you can cut back or how you can increase your income. Avoid carrying a balance on your credit cards – it’s a dangerous habit.
4. Don't let the budgeting process overwhelm you.
Starting with even a basic financial budget is better than not budgeting at all. If you're overwhelmed by the idea, start small. Save your receipts for one month, separating them into categories (i.e. gas receipts, restaurant meals, groceries, etc.). This should give you a reasonable picture of your monthly expenditures for each category. If you pay for these things with a credit card, you can probably use the card provider’s online tools to categorize and sum up each type of expense over a typical month. There are also mobile apps, software packages and financial planning tools available to help physicians and other busy professionals to create and manage a budget.
Medical Practice Budgeting
A budget for a medical practice is just as important as your personal budget. While the tips described above make sense for both physicians and non-physicians alike, there are special considerations when creating a budget for a physician’s medical practice. A practice's budget not only tracks revenues and expenditures, it helps you plan for them. When it’s time to make decisions about adding or reducing staff, moving to new space or purchasing/leasing new equipment, a budget will be invaluable in helping to identify your options.
When projecting the revenue side of your medical practice budget, evaluate the services you currently offer as well as others you could offer. Consider the expenses associated with those services when determining whether changes are merited. Are the expenses required to deliver a service higher than the revenue that service generates? If so, you may need to adjust what you charge. Changes in sources of revenue will affect your expenses, and vice versa; you have to look at both sides of the equation.
Look at the expenses associated with those services when determining whether changes are merited. Changes in your revenue will affect your expenses, and vice versa, so you can't just look at one side of the equation.
Most planners agree that medical practice budgets should use separate revenue lines for each physician in your practice. Some practices break things down further, using separate revenue lines for different types of services provided. This can help to identify if too much, or too little, of the practice is allocated to a certain service or area.
However you decide to organize your medical practice budget, revisit it and adjust periodically as needed, and make sure it is realistic for your practice. Creating a pie-in-the-sky budget that is overly optimistic in terms of the number of patients you can see, the fees you can charge or expenses you might be able to reduce probably means you won’t be able to stick to the plan, so it won't add value to your practice.
Your Financial Professional Can Help
When you approach your personal and professional finances systematically, when you make a plan and stick to it, you can make the most of your income. Budgeting isn't always easy for physicians but it doesn't have to be difficult either. Contact your financial advisor to get started on creating and managing your budget - your finances will thank you later. If you do not yet have an advisor, we invite you to download our free guide to help you learn what matters most when considering a Financial Advisor.
Gold Medal Waters is a fee only financial planner located in Boulder, Colorado that specializes in serving the unique needs of physicians and high net worth clients. Coordinating a great financial plan isn’t easy. Learn more about what sets us apart, or talk to an advisor and get a free meeting to see if we are the right firm for you.