Are you debt-neutral, debt-averse, or “debt-particular?”

Most of us have financial goals we’d like to achieve, whether that’s owning a home, earning a certain salary, or having a set amount of investments and passive income. We may even desire to become debt-free. When it comes to debt, most people fall into 1 of 3 categories: Debt-Neutral, Debt-Averse, or Debt-Particular.  

DEBT-NEUTRAL:

Debt-Neutral is the category used to describe people who lack strong feelings about debt. I don’t think anyone likes debt, but some people may simply feel indifferent to it. Perhaps they view debt as a way to make things more convenient and use it to purchase things they wouldn’t ordinarily be able to buy.

Unfortunately, being debt-neutral, especially when it comes to consumer debt, can get us into trouble. Borrowing money to purchase things, especially items that decrease in value over time (like cars, clothes, and electronics), can can lead to bad habits that lower our net worth. While credit cards, equity loans, and financing deals can make things more affordable in the short-term, they often end up costing us more overall, especially when we consider the interest that is added.

DEBT-AVERSE:

Debt-Averse is the category used to describe people who hate debt. This category is usually full of young professionals who took out student loans or racked up credit card debt early in life. Now they may be in the repayment phase and likely loathe every second of it. They realize that the more debt payments they have, the less money they can use to save and invest the way they would prefer.

People who are debt-averse are usually “in tune” with their finances and have a budget or spending plan that allows them to pay off their credit cards, student loans, and auto loans by a certain date. They may even be hesitant to get a mortgage. While this may sound aggressive, it has several advantages. Being eager to pay down debt, will help you save money over time since you won’t have as many loans to repay. Plus, it also changes your spending habits and mindset. The process of paying off debt is a long-standing practice of frugality that makes you less materialistic and teaches you to live below your means. When you no longer have debt to pay back, you can be a lot more selective in the jobs you take, number of hours you work, and quality of life you live.

DEBT-PARTICULAR:

Too much of anything can be detrimental, so people in this group attempt to use debt to their advantage. They are usually experienced investors who know better than to purchase liabilities (things that decrease in value) with borrowed money, but may feel differently about assets. Instead of being indifferent to consumer debt or living a life of frugality to pay off their loans in record time, they have a different philosophy: use debt to increase your net worth by borrowing money to purchase things that increase in value over time.

Instead of simply paying off debt, they focus more on increasing their income. Many people in this group have read some investment guide or come across Robert Kiyosaki’s “Rich Dad, Poor Dad” and realized that purchasing assets is one of the ways the rich get richer. They may have even considered taking out loans to purchase real estate or invest in a business that could increase in value and create an additional revenue stream.

My point: There are 3 groups of people when it comes to debt. Those who are debt-neutral and have a decent amount of consumer debt with no realistic timeframe on when they will pay it back. Those who are debt-averse and have an aggressive plan to pay back their debt in record time. Lastly, those who are what I call “debt-particular.” They avoid bad debt (by not borrowing money to purchase things like cars clothes and electronics that decrease in value), but don’t mind good debt (taking out loans to invest in assets like real estate or businesses that may increase in value overtime or provide an additional revenue stream).

Which group do you think you are in?

Good Debt vs Bad Debt

As a young college student or post-grad, you may have accumulated credit card debt. I certainly did. However, somewhere in the process of “adulting” you may have realized that having lots of debt isn’t a good thing. You may have even heard investment gurus like Dave Ramsey preach that all debt is bad and insist that people do any and everything to rid themselves of the terrible “D-word” as fast as they can. This can be great advice in many circumstances, but some things aren’t so black and white.

If you’ve attempted to delve into the world of personal finance, you might have seen some investors adopt a more nuanced philosophy. They believe that there is “good debt” and “bad debt.” Let me explain.

What is “Bad Debt?”

Bad debt is usually consumer debt. It’s when you borrow money via a bank loan, credit card, or store financing to purchase things like cars, clothes, or electronics that lose value over time. Some people may even view some student loans as bad debt, especially if they have a substantial amount of loans that may take a long time to repay.

What makes it bad?

The things purchased with “consumer debt” usually depreciate or go down in value over time. Plus, the interest rate at which we borrowed the money to purchase these items is high. Because the item depreciates and the interest rate is high, you end up paying a lot more for these items than they are actually worth. Taking months or even years to over-pay for something that loses value is inefficient at best and a waste at worst. Plus, you exponentially delay your ability to build wealth since the money you spend making payments is money that isn’t going towards your investments or things that will build your net worth. Instead of earning 5-10% profit on your money inside of a retirement account or lucrative investment, you are instead paying an extra 5-10% on something that is now worth a lot less.

Pro Tip on Bad debt: Get rid of it. Since bad debt, causes us to overpay for things that decrease in value, we should get rid of it and stop accumulating more. We should work to pay off our car loans, credit cards, and other high-interest debt as quickly as we can.

What is “Good Debt?”

Good debt is usually “investment debt.” It’s when you borrow money via a bank loan or private loan to purchase things like real estate, businesses, or commodities that increase in value over time. Some people may even view some student loans as good debt if the degree they obtained with the student loans allows them to get a high-paying job they wouldn’t have gotten without the taking out loans.

What makes it good?

You were able to borrow the money at a low interest rate and purchase things that appreciate or go up in value over time. Getting a loan to purchase assets (things that increase in value) is considered good debt because you can theoretically sell the item, pay back the money you borrowed, and make a profit in return. In fact, this is one of the main ways people build wealth through real estate investing. Many investors borrow money to purchase a home (by taking out a mortgage) and use the tenant’s rent payment to pay off the mortgage over time. Some experienced real estate investors may even secure investment loans that allow them to purchase an entire apartment complex or commercial building. They work to increase the value of the building (by renovating it and raising the rents), then sell the building to another investor a few years later at price that allows them to pay back the money they borrowed and keep a large profit in return.

Pro Tip on Good Debt: Be cautious. While it may make financial sense to accumulate good debt to increase the number of assets you own, make sure you are in a financial position to do so. Having too much debt, good or bad, can put you at risk of defaulting on loans if unexpected events occur. Good debt is something to consider once all of the “bad debt” is gone and an investment opportunity you have studied extensively is presented.

My Point? Bad debt is bad because you borrow money at a high interest rate to purchase liabilities (that decrease in value over time) which can decrease your net worth. Good debt is good because you are able to borrow money at a low interest rate to purchase assets (that increase in value over time) which can increase your net worth. Get rid of bad debt, be cautious about good debt.

The Power of Focus: Pick your ONE thing

As young professionals who have overcome the post-grad struggle and are finally starting to build our careers, we understand the value of money. It may not be the only thing we care about, but having enough of it to live well and enjoy life with our loved ones is essential. Instead of mindlessly spending money then awaiting our next paychecks, we should re-examine our habits and utilize the power of focus.

Step 1: Determine your top 5 “big” goals.

While the devil is in the details, it’s often helpful to start by looking at the bigger picture. A few times a year I sit back and think about my overall financial goals. Although this can seem a bit esoteric initially, it doesn’t have to be. Simply identify your most important financial goals. As a young resident physician my top 5 goals are to:

1-Be completely debt-free;

2-Own a home;

3-Take international vacations;

4-Give to charity;

5-Be financially independent (aka have the flexibility to work less without worrying about money)

What are your top 5 financial goals?

Step 2: Write down a few things you must do to achieve them

Once you determine the financial goals that are most important to you, write down ways you plan to achieve these goals. For me, that means tracking my spending and sticking to a budget. It means saving a percentage of my income each month and investing money towards retirement. If I’m being honest, it also means staying away from the mall so I’m not tempted to buy cute clothes and new dresses whenever my favorite stores are having a sale. It even means forgoing the temptation to buy things online after seeing new home décor ideas on Pinterest. Most importantly, it means eliminating any consumer debt and having the self-control not to accumulate more in the meantime. What are some things you must do to reach your larger financial goals?

Step 3: Choose one thing to change about your finances over the next 6 months

To be honest, I’m eager to become financially independent. I wish I could snap my fingers and erase my massive student loan debt and have millions saved for retirement. Don’t we all? Unfortunately, life doesn’t work that way. Realistically speaking, it will be about 10 years before my student loans are paid off or forgiven. I’ll be well into my 30s before I can comfortably purchase my dream home and in my late 40s before I can truly become financially independent. Although both of those goals can seem far away, there are several things I can do now to put myself in a great position going forward. However, trying to do all of them at once can be daunting and unsustainable.

I’m the type of person that needs to see progress. I need to feel as though the sacrifices I’m making (aka the cute clothes I’m not buying and lavish vacations I’m trying hard not to book) are actually worth it. Thus, I find it helpful to focus on one thing. Choose one change you want to make in your finances over the next 6 months, whether that’s trying not to spend more than $100 on take-out, putting $300 into a savings account every pay period, or contributing 10% of your salary towards retirement. Choose one thing to stick to over the next 6 months. My one thing is eliminating the credit card debt I accumulated in grad school.  What is your one thing?

Step 4: Laser focus on that one thing

Once you pick your “one” thing. Laser focus on it. Since I’m someone who loathes consumer debt, I’m laser focused on eliminating it. How? By literally throwing money at my credit card balance each month. As a resident physician, I’m definitely not making the doctor salary people google online, just yet. I don’t drive a Tesla, own a large home, or spend money frivolously without remorse. However, as a single person with no kids, who is an employed physician, I make enough to pay off my credit card debt. In fact, despite having a negligible “minimum payment,” I send in a several hundred dollars each month and should be credit-card debt free by the end of the year. I realize everyone’s financial situation may be different, but we should all laser focus on one thing. In what way do you plan to do this?

My point? Instead of getting bogged down by large goals that seem far off, I have found it helpful to focus on one small goal every 3-6 months. I like to see progress and achieving these small goals will give me the momentum needed to continue along the journey to reaching my larger goals. What do you think? Is this a strategy you believe will work for you?

Resident Physicians: 6 Questions To Ask Yourself Before You Spend Your First Paycheck

I originally published this article on Doximity’s “Op-Med" tailored for medical doctors. Check it out below:

As resident physicians, we work a ton! Fortunately, it’s not all in vain. Unlike our life as medical students, we finally get paid! But before we spend all the money from our first checks and start treating ourselves to over-priced dinners, let’s stop and think things through. Despite the temptation to spend what we have and wait for the next check to appear, let’s set some financial goals and create a spending plan.

Since everyone’s priorities may differ, it’s important to tailor your spending plan to your own individual needs. As you think about getting your finances in order, you must first determine what’s most important to you by answering these 6 questions:  

1. Do you have an emergency fund? Those of us who are just entering the workforce may not have started saving money just yet. However, building up an emergency fund is something we all may want to prioritize sooner rather than later. If our car breaks down or a family member gets sick, money in this fund gives us the means to pay for these events without relying on a credit card or accumulating debt. Although the amount of money in this fund may vary from person to person, having anywhere from $1,000 to 3 months of expenses is a decent starting point. 

2. Do you want to be debt free as soon as possible? Some of us are debt-averse. We can’t stand the thought of having a credit card balance and loathe our student loans more than anyone could imagine. Other people are more debt-neutral. They feel that debt was a necessary expense to get to this point in their lives and are in no immediate rush to get rid of it. Regardless of which camp you’re in, it’s important to have a plan. If you are debt-averse, you may want to decrease your living expenses and allot a larger portion of your budget to paying off credit card debt. If you are more debt-neutral you may simply aim to meet the minimum payments on your student loan balance and spend your money on other things.  

3. Do you want to save money for retirement? As young adults out in the workforce, it’s important to think about retirement. No matter how invincible we feel, we likely won’t work for the rest of our lives and will need a plan in place to support ourselves during that time. Although retirement can seem a long way away, we have to start planning for this period as soon as we can. It often takes 20-30 years to accumulate enough money for retirement and as doctors who have spent the majority of our lives in school, we have some catching up to do. While some residents may prioritize paying off debt, providing for their kids, or managing expenses in a high-cost-of-living area, others of us may able to set aside 5-10% of our income for retirement. Although we may be tempted to hold off on retirement savings for a few years, the sooner we start contributing to retirement, the sooner we can allow the magic of compound interest to work in our favor and build our net worth.  

4. Do you want to have money for vacations? As resident physicians we are often over-worked and under paid. I’m in family medicine and even I average around 60 hours per week, so I can only imagine how what life is like for some of you surgeons. Since we work so many hours with so few days off, it’s important for us to take advantage of our vacation time. While laying in bed for a week may sound like heaven on earth, we may actually want to consider taking a trip away from home. In fact, it may be a good idea to prioritize putting a couple hundred bucks a month into a “vacation fund” so that we can afford to travel the world or have a relaxing vacation once or twice a year. Many of our residencies emphasize self-care, saving up for a much-needed vacation may be the perfect idea. 

5. Do you want to live comfortably? As young professionals who have sacrificed most of our 20s to practice medicine, we can get a bit overwhelmed. While self-care for some people may involve an expensive vacation once a year, others of us may need to find more frequent sources of enjoyment, one of which may include our home environment. Instead of saving hundreds of dollars each month to take a vacation, you may instead choose to spend that money living in a nicer place. Or, perhaps you’d rather spend that money on personal massages, monthly concerts, or fancy gym memberships. Regardless of your version of self-care, you must decide how big of a priority it is for you so that you can make room for it in your budget. 

6. Do you want to give money away to others? I know this last question may seem a bit out of place, especially for us residents barely keeping our heads above water, but let me explain. Oddly enough, many people find that they get more enjoyment out of life when they give to others rather than spend money on themselves. It’s as if the act of generosity has a boomerang effect that blesses our own lives as much it does the recipient of our gift(s). For many Christians, this may mean giving 10% of their income to the church as a tithe. For others, it may mean donating to charity, supporting a cause with which they most identify, or perhaps sharing resources with someone less fortunate. Regardless, of your method, you may find that setting aside money to give to others adds more value to your life than you expected.

What am I doing? A little bit of everything. I don’t have an emergency fund, so setting aside at least $1,000 in a savings account is a top priority for me. Since I’m enrolling in a student loan forgiveness program (aka PSLF) I am in no rush to pay them down. However, I do have some credit card debt from my days in graduate school that I plan to pay off as quickly as possible. Once that debt is gone, I’ll start putting 5-10% of my income into my job’s 403b retirement plan. While those are my financial goals for this year, I also have some financial priorities for each month. I set aside a couple hundred bucks for self-care, have a separate vacation fund, and carve out a certain amount for charitable donations. Choosing these financial priorities has made budgeting so much easier and also ensures that I maintain a decent quality of life.

What about you? What are some of your financial goals and monthly priorities?

How to get ahead in your finances: Pay yourself first.

If you’ve ever delved into the world of personal finance, you might have heard of the phrase “pay yourself first.” In fact, many investment gurus mention this approach as one of the keys to getting your finances on track and building your net worth.

What does “paying yourself first” mean? This concept can seem confusing initially, so let me break it down. Paying yourself first simply means making yourself a priority. It’s actively choosing to invest in things that build your net worth before you spend money on anything else. 

Pro Tip: This can be hard to do at first. As responsible adults, our first inclination may be to pay our bills, buy necessities, and use whatever is leftover to “invest in ourselves.” The problem with this approach, at least for me, was that there never seemed to be any money leftover. Some unexpected expense would occur or I’d end up spending money on something else that didn’t even need. I never seemed to have money leftover to save or invest. “Paying myself first” helped me change that. Now, instead of spending the majority of my check and wondering where my money went, I do things differently. I invest in myself first, then use the leftover money to pay my bills, reserve money for food and transportation, and spend the remainder on entertainment and incidentals. 

How is it done?  Do exactly what it says. Pay yourself first. In other words, the very first thing you do when you get paid is use a certain percentage of your check to build your net worth.  This means having a set amount of money reserved for the sole purpose of paying down debt, saving for retirement, or investing in other types of lucrative deals. When you reserve money for these purposes, you are actively investing in your future in a way that builds your net worth and puts you in a better position financially. 

Pro Tip: Make this automatic. Outline a budget of your monthly expenses and estimate how much you can afford to save for retirement or use to pay off debt each month. This can be anywhere from $5 to hundreds of dollars each pay period and beyond. Once you have a set amount that you can spend on investments and debt pay down, go into your mobile banking app and get this amount automatically deducted from your check the same day you get paid. Doing this ensures that you are “paying yourself first” and makes building your net worth a priority. It also prevents you from spending your “extra” money on things you don’t need.   

Why does it work so well? Most of know we need to invest in ourselves. We realize that having money is important and that spending all we earn isn’t the wisest thing, but sometimes life can get in the way. Either that or our bad habits can stop us from doing what we know is right. It’s this reason that the concept of paying yourself first was born. It forces us to implement the strategy of investing in ourselves before we do anything else, especially when set up this automatic withdrawals. Unlike other strategies, this method doesn’t rely on our own self-control or fail due to our lack of self-discipline.

Pro Tip: Before I got my first paycheck as a doctor, I set up the payroll from my job in way that would virtually ensure that I achieved my financial goals. The first thing I did was determine what percentage of my income I wanted to store away for retirement and choose the index funds I wanted to invest in to help my money grow. Then, I went to the “banking” part of my work payroll website and decided that I would have 25% of my check directly deposited into an entirely separate savings account. I use the money in this separate account to pay down debt and save up an emergency fund. Because I don’t have a debit card for this account, it’s almost impossible for me to spend this money. Since I don’t really “see” this money in my main checking account, I’ve gotten use to living on the remaining 75% of my take-home pay. 

My point? Paying myself first has helped me in so many ways. I’m investing in my retirement without even thinking about (since my retirement contributions are deducted before I ever get my check). I am also saving more money than I ever have before. I have a separate account for travel that I can now use to pay for my future vacation(s) in cash. Plus, I have paid off a substantial amount of credit card debt that I had from my years as a graduate student. This combination of paying off debt, saving money in separate accounts, and investing for retirement is helping me build my net worth faster than I ever would have thought. As my net worth increases, my credit score gets better. Paying myself first has given me reassurance that I’m on track to reach my financial goals.

Tell me, in what ways do you “pay yourself first?” If you haven’t yet started, is this something you’d be willing to try? 

6 Reasons I’m Not Buying Whole Life Insurance (and you shouldn’t either)

If you’re a physician or high-income earner, you’ve probably been approached to purchase whole life insurance. While many of your fiscally responsible colleagues may warn you not to buy it, many other financial advisors seem convinced that whole life insurance is a must-have. With such conflicting advice, you may be confused on who to listen to and unsure about what to do. Several of my physician friends are in the same boat. In fact, many of them have asked me to help them understand why “whole” life insurance is so bad and “term” life insurance is ideal. Here was my response:  

Most whole life insurance policies, universal life insurance policies, indexed life insurance policies, (and basically anything other than term life insurance) is sold to us under false pretenses. These policies are branded as a way to “guarantee” our family money when we die. However, if you delve into the fine print of these polices you will see that they aren’t nearly as good as they sound. In fact, there are 6 main problems with whole life insurance:   

1.     You don’t need it. Unlike disability insurance, where we insure against the unpredictable risk of becoming disabled, life insurance is different. We already know that we will “pass away” at some point. Thus, dying isn’t necessarily a “risky” event, it is an EXPECTED event. Any event that you can expect to happen, you can plan for yourself. Since you can plan for this event yourself, you only need to insure against the risk that you could die before this plan is fully carried out. In other words, you don’t need life insurance for your “whole” life. You only it for a certain period of time or “term.”

2.     It’s inefficient. In order for whole life insurance companies to guarantee your family money after you die, they must have money to give them. Insurance companies aren’t charities, so they definitely are not giving your family money out of their own pocket. What they do is collect a large amount of YOUR money to pay into THEIR system. In fact, the financial advisors who sell you whole life insurance put a large portion of your money into their own pockets as profits, then take the rest and “invest it” into low-yield accounts. If you die young, your family may not get much of anything at all because you’ve haven’t paid into the system for long. If you die old, your family won’t get nearly as much as they should because the insurance company still needs to make a profit. With whole life insurance, you end up paying a huge chunk of money to an insurance company that will give you and your family much less in return.

3.     It’s expensive. Whole life insurance policies pay out to your dependents after you pass away. Thus, insurance companies will want you to pay for the cost of that benefit upfront. Paying for this benefit is insanely expensive. In fact, whole life insurance costs about 10x more than term life insurance. This means you could easily be paying hundreds if not thousands of dollars each month for this policy. That’s a lot of money to spend on an inefficient insurance product you don’t need.

4.     There are lots of hidden fees. The vast majority of whole life insurance products have a slew of hidden fees. These expenses take away from the value of the product and drastically decrease the benefit your dependents receive when you die. In fact, most of the money you pay the insurance company for a whole life insurance policy is paid directly to the agent who sold you the policy as “commission.” I can think of many more ways you can spend your money, than to pay tens of thousands of dollars in commission fees to an insurance agent.  

5.     The benefit isn’t as good as you think. If you look at the fine print of these whole life insurance policies, you’ll see that the benefit it provides to your family isn’t very good. In fact, the “returns” are actually negative in the first few years. This means that if you die shortly after you purchase a whole life insurance policy, your family may not get anything at all, even though you’ve paid thousands of dollars in premiums. If you die much later in life, the average returns on your money are only 2-4%. In contrast, average returns from the stock market are 7-10%. This means that if you had simply placed your money into an index mutual fund, you’d have been able to give you family drastically more money and paid much less in fees.

6.     There’s a better alternative. The biggest reason I’m against whole life insurance is that there is a much better way to proceed. You can save money for your loved ones without ever having to purchase whole life insurance. How? By maxing out your retirement accounts so that you can save and invest money in a tax-efficient way. By converting money each year to Roth accounts (like a Roth IRA) so that your family can inherit the money you save tax-free. By purchasing a “TERM” life insurance policy so that if you happen to die before you’ve been able to pay off your student loans and stack enough money for your family, the insurance company will provide a hefty benefit to your family.

My point? As busy young professionals, we already sacrifice a lot. The last thing we need to do is to get tricked into purchasing an insanely expensive insurance product that has lots of hidden fees. There is a much better alternative. Save money for your family yourself and purchase a “term” life insurance policy to cover yourself in the meantime. Don’t buy whole life insurance.

My residency spending plan: a new way to think about budgeting

As a young professional with many competing expenses, it is paramount for me to prioritize my spending. However, adhering to a strict budget can seem a bit daunting and restrictive. To get over this anxiety, I started out with a spending plan that mirrors the “50-30-20 rule” by allocating money into 3 different buckets: things I have to buy, things I want to buy, and things I should buy. Let me explain.

Category #1: Things I Have to Buy 

This category is for my fixed expenses. It includes the bills and necessary purchases I must make to survive. This includes my monthly rent and other bills (like electricity, internet, water, and sewage). I also use this category to pay for groceries, gas, and different types of medical insurance (i.e. vision, dental, and disability). For young adults just starting out in their careers, this category of fixed, necessary expenses can take up about 50% of your take-home pay. For young professionals established in their career, it may be a much lower percentage. For me, this amounts to about 45% of my take-home pay. 

Pro Tip: If your fixed expenses add up to over 50% of your income, consider ways you can cut costs or increase your income. I tried to do both. In order to decrease costs, I decided to live with a roommate. This not only lowered my monthly rent payment, but it also allowed me to split many other bills, which substantially lowered my living expenses. Along with decreasing costs, I also created a second source of income. As a resident physician with limited free time, I couldn’t get a second job, nor did I want to. Instead, I decided to turn something I love (blogging) into a second source of income by monetizing my blog and accepting paying offers to write for other platforms. Whether you enjoy writing or have another area of interest, think about what you love to do and consider different ways you can turn your hobby into a second source of income. 

Category #2: Things I Want to Buy 

This category is for my discretionary spending “aka” non-necessities that increase my quality of life. These expenses can differ for each person but for me they include: entertainment (like weekend outings to the movies, sporting events, and restaurants), self-care (like personal grooming, hair appointments, and gym memberships), and incidentals (such car maintenance, birthday gifts, and other unexpected expenses). This is also the area I dedicate to giving. As a Christian I try my best to give to the less fortunate and donate to organizations that do the same. 

Pro Tip: Everyone’s list of discretionary spending may vary. I choose to drive an older car and spend extra money on entertainment and self-care. You may, instead, choose to drive a much nicer car and opt for a car payment. The items you choose to purchase can differ from mine. The goal is to keep your discretionary spending to about 20-30% of your take-home pay. Mine is 25%.

Category #3: Things I Should Buy 

This category is for monetary growth. It is the part of my take-home pay I use to increase my net worth and build financial security. This can be done in a variety of ways, but I use this section of my budget to save, invest, and pay down debt. For example, I put a certain percentage of money into an emergency fund and secondary savings account (which I will use for unexpected expenses, a future vacation, a house down payment, etc). I also allot a portion of money from this category to invest in my employer-sponsored retirement account (which is a 403b retirement savings plan through which I invest in a combination of stocks and bonds). Lastly, I use this category of money to pay down student loans and credit card debt. 

Pro Tip: You can increase your net worth by either paying down debt or increasing your investments. I do both. The goal is to reserve at least 20% of your take-home pay to this category to ensure you have an adequate emergency fund and are saving enough money for retirement. Since I was unable to work during my time in medical school and incurred some credit card debt when I moved to another state, I am allotting about 30% of my budget to this category to “catch up.” However, your exact percentage may differ from mine. You may need to start off by allocating a much smaller amount to this category and increasing the percentage over time.

Generally speaking: the amount you allot to these 3 categories may vary. The important thing is to make sure you have a portion of your budget reserved for all 3 areas.

Tell me, was this helpful? What percentage of your check do you have allocated to these 3 areas?

6 surprising benefits of having a spending plan

In order to practice good money management, we must put a valiant effort into getting our spending habits under control. Although challenging, creating a monthly budget or at least having a “spending plan,” can really help us get on the right track. When I finally started following a budget not only did my finances improve, but I also noticed these 6 surprising benefits:  

1. I am better organized. Before I created a budget, I used to “guesstimate” how much money I spent each month. After a few weeks, I’d realize that my bank account was lower than I anticipated and would just tell myself to “try harder” next time. As you can imagine, that didn’t work. I was still spending too much money and barely making ends meet. When I finally sat down and made a monthly budget things changed for the better. With a budget, I actually know how much I can afford to spend on certain items and can plan better strategies on how to meet my financial goals.

2. I know what is happening to my money. Now that I have a realistic budget, my spending habits have changed. I am more aware of fixed vs variable expenses and have a rough idea of how much money is in my bank account at all times. Because of this awareness, I no longer have anxiety opening my mobile banking app or logging into mint.com. I know how much I can afford to spend on food and which times I can splurge on other items. Instead of getting to the end of the month and wondering where my money went, I am now the one telling it where to go. 

3. I feel less guilty when I spend money on myself. Before I created a budget, I felt guilty spending money on myself. Even though I worked hard, I always felt like I should be using the “extra” money I had to pay off credit card bills or save for retirement. At one point, my guilt was so bad that I could barely walk into the nail salon without feeling financially irresponsible. All of that changed when I actually created a budget. Each month I allocate a certain amount to “personal grooming and self-care.” I now have a small portion of my budget set aside for a monthly pedicure and trip to the hair salon. This minor change adds so much to my quality of life. It makes me happy knowing that I can enjoy myself from time-to-time and remain on track to meet my financial goals. 

4. I worry less about my bills. Before I had a spending plan, paying bills near the end of the month gave me anxiety. Even though I knew the bill was coming, I had usually spent too much money earlier in the month so paying that bill would lower the balance in my checking account to a level that I was not comfortable with. Facing that reality caused me great angst on a regular basis. When I created a budget, things changed. Fixed expenses that come out of my check are no longer a surprise to me, regardless of when the money is deducted. I am more aware of my spending throughout the month which makes me better prepared to pay those mid-month bills when they come.

5. I actually save money each month. Before I had a budget, saving money was something I didn’t think I could afford to do. I swiped my card whenever I deemed it necessary and was genuinely surprised that I didn’t have much left over at the end of the month. When I created a budget, this changed. I became much more aware of how my unhealthy spending habits precluded by ability to save. Nowadays, I solve this problem by actually “paying myself first.” I have a portion of my check directly deposited into a totally different bank account. Since I hardly ever use this secondary account, I don’t really “see” the money I am missing. As result, the money in this account has continued to build over time. As I continue to work in residency, I’ll have this separate bank account serve as an emergency fund, new car fund, and vacation savings account. 

6. I finally started giving. As a well-intentioned Christian, I try to give to others. Generosity not only blesses the other person, but it does something internally to the giver as well. Every time I give, I get this wave of gratitude knowing that I helped make someone else’s life better. Creating a budget has allowed me to continue these good deeds on a regular basis. Instead of feeling like I can’t afford to share with others, having a spending plan helped me see where I could make room in my budget to tithe and make small charitable donations. It might take me a little longer to become financially independent, but to me, this sacrifice is worth it. Giving to others brings me so much joy and helps me maintain perspective. It also allows me to enjoy the work I’m doing so much more. Without a budget, I wouldn’t be able to continue this practice.

For these 6 ways and more, creating a spending plan has really enhanced my life. If you haven’t already, sit down and make a budget and see if you experience some of these same benefits. As the old saying goes “Do something today that your future self will thank you for.” Believe me, creating a budget (and sticking to it) is something you won’t regret.  

Tell me, was this helpful? What other benefits have you gotten from creating a budget?