Personal Finance: Where to Start?
The term “budget” is the proverbial nails on the chalkboard. The internet is filled with endless budgeting templates, each with their own nuances. I am going to throw another buzzword out there. Diet. Budgets and diets are essentially the same concept. If more money comes in than out, budget surplus. If more calories are burned via exercise and metabolism than are consumed, caloric deficit. These concepts are greatly overcomplicated.
To prove a point, a college instructor allowed his class to design a 30-day meal plan using only McDonald's menu items. I wish I could remember where I read this, please forgive me. At the end of the 30 days, the instructor had lost 7 or so pounds because at the end of the day he was in a caloric deficit. Sure there are healthier options but it is the deficit that matters. Just like with financial goals, it is the budget surplus that matters.
So how to start a budget…
STEP 1 – Set a Specific and Measurable Goal
The key to financial goal setting is to set a dollar amount and a time frame. This could be retirement savings, student loans, mortgage, or a vacation abroad. Let's use easy numbers and say a CRNA named Bill has $120,000 in student loan debt he would like to pay off in 3 years. This goal clearly defines that Bill must set aside $3,333 per month to meet this goal.
STEP 2 – Work Backwards
Bill creates a written budget that shows his monthly expenses and income. Let’s assume take home pay (net pay) as a W2 (hospital) employee. The goal amount as defined in step one will be the first item to be paid every month
STEP 3 – Fill in the Budget
Bill makes $190,000 gross annual income, so he takes home around $11,000 per month. After subtracting the $3,333 Bill has $7,667 remaining for his other expenses such as food, clothing, and shelter. He should fill in how much he spends in each of these areas. All of his spending should be accounted for.
STEP 4 – Examine the Budget
Does Bill have a budget deficit or surplus in this generic example?
Student Loans - $3,333 (must be paid no matter what)
Housing - $2,000
Vehicle - $1,000
Utilities/Internet/Phone - $500
Food - $1,000
Entertainment - $500
Discretionary - $1,000
Miscellaneous - $1,000
____________________________
Total $10,333
Budget Surplus of $777
STEP 5 – Implement Change
If Bill has a surplus, he should apply the extra income towards the financial goal of paying off his student loans. Paying the extra $777 towards the loan each month ($4,000 total) will shorten the timeline from 36 down to 30 months. Resist the urge to spend the extra money in the other categories until the goal is achieved.
If Bill has a budget deficit meaning he can not pay $3,333 per month towards his loans plus maintain his standard of living, he has a decision to make. The decision is NOT whether he should pay less towards his student loans. The decision is to decide where he will cut expenses. Remember, the financial goal gets paid first.
How have I used this technique? I use this technique all the time. While working two summer jobs during high school and college, I had a dollar amount I needed to put away each week to meet my tuition and living expenses for that year. Without many undergraduate scholarships, I was responsible for the majority of my education costs. Working a sickening number of hours combined with in-state tuition allowed for a debt free degree.
Similarly, while working as a nurse, I knew how much I needed to put away each year to cover of the six-figure tuition for anesthesia school. My living expenses remained modest throughout, but I made sure to throw in a couple vacations here and there. This led to…you guessed it…another self-funded debt free degree.
Today I use this same plan to calculate my monthly investing rate to reach retirement. I have looked at how much my wife and I need to live and what kind of return the portfolio is expected to produce. This gives me a dollar amount and I am fanatical about meeting or exceeding that number every month. It prides me to know my financial decisions up to this point have me set up to retire firmly in the middle class at age 35! I have no plans of leaving anesthesia any time soon, but the future is uncertain, and options are good. Sounds like a fail to plan is a planning to fail sort of approach.
Please reach out with questions, comments, concerns, or sarcasm via the “contact us” page. Do not hesitate to reach out if you want me to lay eyes on your personal budget to get you on the right path.
-Best of luck and may your numbers work in your favor.
