How to Plan for Cash Flow in the Early Stage of your Medical Career
When you're in the early part of your medical career, getting a handle on your income and your money going out towards bills, student loans, and other expenses can be difficult. But by taking the time to determine your inflow and outflow of funds, you can help spot potential problems before they get out of hand and discover opportunities to spend smarter or save more. It can also help you alleviate the feeling that you’re never going to get out from under a big pile of debt.
By getting a handle on cash flow, you can start to prioritize your money and your spending and also keep an eye on what “future you” wants to achieve.
Track Your Income and Expenses
It’s good to get a sense of your typical spending patterns. Track all your money coming in through salary or any other source for several months, and compare it against your monthly bills, including debt payments and all additional spending (eating out, purchases in stores, etc.)
This tracking should be straightforward if you pay most of your bills online and charge most of your spending to your credit card. You could also input your income and expenditure into a budgeting app such as Mint or YNAB.
If you still use cash to buy things, write down those purchases when you make them. Though the process can be tedious, and your totals will vary from month to month, tracking your cash flow can help you discover where your money goes every month and opportunities where you can plug spending holes.
Review Your Problem Areas
Tracking your spending is often an eye-opening experience. Many of my clients tell me they didn’t realize how much they were spending on things like streaming and other subscriptions they don’t use or eating out and ordering takeout. Also, with our recent high inflation, you may not realize how much gas and the weekly supermarket run are now costing you each month.
Find ways to cut back if your spending exceeds your income or is just higher than you’re comfortable with. For example, you can achieve some easy wins by eating out less frequently, driving less, opting for a more fuel-efficient car, or limiting your spending on entertainment and nonessential travel.
Automate Savings
The easiest savings plan to follow is the one that doesn’t require any work on your part. Once you know how much you can safely put away each month from your income and still pay your bills, look to automate your savings as much as you can.
Top priorities are contributing a portion of each paycheck into a workplace retirement plan such as a 403(b) or 401(k) and building an emergency fund.
Even though retirement is decades away, saving today for retirement can provide tax breaks and give your money years to grow. As of 2022, you can save up to $20,500 a year in a 401(k) or 403(b) plan. Also, if you have access to a 457(b) plan, as many doctors working in a hospital do, you can save an additional $20,500 a year into that account.
The Automated Savings Process Flow
Step 1: Pay Your Future Self First
This means savings and debt reduction, your two highest priorities right now. In addition to the retirement plans discussed above, consider HSAs and then move to taxable investment accounts. A good rule of thumb for early-stage physicians is that 20-40% of your pay goes directly to paying yourself first.
Step 2: Future Expenses
The key here is named savings accounts. Your emergency fund is the first one, but then think about:
· Down payment on a home
· Buying into a practice
· Any other big-ticket item
Step 3: Pay Your Monthly Bills
Set up a bill-may account, then automate all your recurring expenses. Rent, mortgage, care insurance, home insurance, etc. This makes it easy to track where your money is going every month. Review it monthly to make sure you still need everything you’re paying for, and annually to see if you can save money on any expenses, like insurance.
Step 4: Discretionary Spending
If you’re good with managing credit, use your credit card for all purchases and build those point incentive bonuses. If not, the free trips aren’t worth overspending on credit cards and increasing your debt load. Use a debit card instead.
Continue cash flow planning
Once you get a handle on your income, spending and saving, don't lower your guard around tracking where your money goes. If you receive a raise or your medical practice becomes more lucrative, set some money aside for additional savings. Be wary of "lifestyle creep," where your level of spending increases at the same rate as your income. Once you introduce a new luxury into your life, you're unlikely to want to live without it.
Changes in your life may mean you need to track your income and spending again. Getting married, moving to a bigger house or more expensive area and having a baby are all events that can dramatically change your spending. Recalibrating your income and outflow can help you adjust to changes in your financial situation while helping to ensure you’re still working toward your money goals.
The Bottom Line
Adjusting to earning a healthy income as a doctor after years of attending school and taking on student loan debt is a significant change. However, by paying attention to your income and spending, you can put yourself on the road to financial strength while still enjoying your lifestyle.