How to budget and save more money

You can’t get married without a budget

As I watched the sun set on my twenties, it dawned on me that I did not want to spend another decade teetering on the precipice of debt. In my twenties I tried to “find myself” through labor and discipline: scooping sawdust out of bins at the City College of New York’s woodworking shop, greasing tins during overnight shifts at the Sullivan Street bakery in Hell’s Kitchen, and washing dishes at SPoT coffee in Buffalo. As I approached my thirties, I decided to “make myself” and I began to seek knowledge from all directions related to personal finance. I listened to hundreds of podcast episodes on from ChooseFI, read dozens of books in the vein of Rich Dad, Poor Dad, and I asked to hear the stories of friends and acquaintances who had reached the mythical status of millionaire. I was committed to escaping the insecurity of financial instability. 

Learning about your workplace benefits 

On an episode of the ChooseFI podcast, I heard that many people have workplace benefits they do not utilize. I contacted Nancy, the human resources officer at my job, and asked to sit down with her for a chat. “Do you know about your EAP benefits?” she asked. “You have all types of free counseling through it: marriage, financial, and nutritional…it really helped me and Teddy get through some tough times.” 

I signed up for financial counseling and soon after, Cole called me to ask a few questions:

“So Sean, do you want to get married?” he asked. 

“Yes,” I responded. 

“Ok, so you’re gonna want to begin saving up money for that. Typically, I recommend my clients save at least $20,000, and if you want to get married in the next five years, you can divide that $20,000 by 60 months. So, add $350 a month to your budget to be safe.” 

We continued forecasting future expenses and breaking them into manageable monthly chunks, while adding them to a spreadsheet. The spreadsheet summed all these expenses up and gave me a numerical value to represent the monthly income I would need to live my ideal lifestyle. 

Why do I need a budget? 

For the first time I realized success no longer had to be a nebulous ideas like “be wealthy,” “happy,” or “famous”. Rather, if I could find a way with all the cleverness, ingenuity, and privilege that I was blessed with to cover my expenses each month, I could then afford a wedding in Mill Valley, owning a home in Sonoma, and winter breaks in Kauai. As a kid in school, I would sit “front-most, center-most,” turn in projects before the deadline, and attend office to have my work reviewed before being graded. I loved the challenge of meeting the expectations provided by teachers. When I transitioned from school into adulthood, I felt disoriented with the lack of expectations and clarity. Where was the syllabus? I spent thousands of dollars and hours creating a music production company, then a writing company, only to have these projects peeter out because I was unable to generate substantial income to support my lifestyle. Learning to budget with Cole taught me the necessary pre-work of estimating expenses and setting financial goals that would keep me afloat during periods of growth and transition. 

How to budget when you are married 

After getting married and joining our bank accounts, my wife and I began to budget together. We would sit down over coffee and sort our disparate expenses from the previous month into neat categories. Sometimes, this led to the revelation of embarrassing spending habits and uncomfortable dialogues. “Sean, why did you spend $600 at Costco this month?” 

“Well, I am opening this new travel rewards credit card and I needed to meet the spending limit so I purchased a $500 Coscto gift card.” 

“WHAT? Why did you open a new credit card without talking with me?” 

Slowly, by budgeting together, I learned financial accountability to my wife, and our relationship deepened because I would weigh each decision with her money and credit in mind. We did our budget in the context of a family meeting and began to set relationship goals. If nothing else, having a family meeting with a budget discussion embedded into it gave us a reason to sit down and be present together. Through this process, I learned about my expenses and which ones I could control and which ones would be consistent on a month-to-month basis. 

What is the difference between fixed and variable expenses? 

By constantly seeking ways to decrease my expenses in order to save more money, I learned the difference between fixed expenses like utilities, transportation, and rent, and variable expenses like eating out, concerts, and subscription services. After reviewing the previous months expenditures, we set objectives to hold our spending on certain variable expenses to a limit for the new month and highlighted that category in red to keep it in mind. Then, we would forecast a number to spend in that category for the current month and hold each other accountable toward that goal. 

How to calculate your savings rate

Our savings rate, or the percentage you get when you divide the money remaining after all your expenses by your total income, hovered around 8% for the year of 2019, even with monthly student debt payments and a new baby daughter. Our goal now is to continuously be above a 10% savings rate each month, and eventually, closer to 50%. Here is an easy way to calculate your savings rate: 

Calculate your savings rate: 
income minus expenses = surplus 
surplus divided by income = savings rate 
How to calculate your savings rate

How can a budget help you save more? 

Before learning to budget, I spent the majority of my twenties with never more than $1,000 in my bank account. Granted, I was lucky not to be in debt, but rarely did I have the extra income to snowboard at Mount Rose, eat out at Central Market, or purchase a Honda that was made in the last ten years. Maintaining a budget became a mirror by which I could reflect on my habits in a small quadrant of time and take immediate action to improve my life. Working with my wife on this process brought us closer together and made us a team that is twice as strong in earning power and accountability than we would be alone. 

Since beginning the budgeting process I’ve met many goals that I set out to do: I purchased a home in Northern California, I married a brilliant and loving woman surrounded by family and friends, and I became a father to a beautiful daughter. Choosing to reflect on my choices through maintaining a budget and collaborating with my wife has given me both the hope and ability to design a life that I want. Where will a budget take you? 

A simple guide to investing for doctors

Imagine that you are making more money than you have ever made in your life? What would you do?

First, identify where you are on this spectrum:

If you can account for what comes and goes out of your accounts, if you have paid off your debts, and saved up an emergency fund, then you are ready to begin investing. 

Where to start in your investing journey

Start with fully-fund your retirement accounts. Depending on your employer you will have access to either a 401(k), for private employers, or for public employers you will have access to a 403(B) and possibly a 457(b). You can google, “401(k) contribution limits” to find out how much you can put into these accounts each year. In 2020, the contribution limits for each of these accounts are the following: 

Pre-Tax Account Contribution Limit 
401(k) $19,500
403(b)$19,500
457(b) $19,500
IRS Contribution Limits for 2020

You fund 401(k)s, 403(b)s, and 457(b)s, with “pretax” dollars, meaning your contributions are taken from your paycheck before taxes are deducted. You will have to pay taxes eventually of course, but not until you retire (age 59.5 or older). The IRS taxes all withdrawals at your ordinary income tax rate at that point. BUT, when you retire, you will have little, to no income, so you will be taxed at a lower rate. 

By fully funded your retirement accounts, you lower your taxable income, thus paying less in taxes. While I can’t tell you exactly how much you will save, you can learn more here: https://www.millionaireeducator.com/2019/11/tax-planning-2020-free-money.html

You can set this up with your HR person at your job. 

Investing your money within your retirement plans: 

Once you open your 401(k), or 403(b) and 457(b) retirement plans, your work is not done. Now you need to choose your investment vehicle within those plans. I choose to invest in index funds with low costs and low fees. 

Why invest in index funds? 

Warren Buffett, arguably the greatest investing mind known to humans, said this in  a 2014 letter to his shareholders: 

My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard‘s [time stock-symbol=VFINX].) I believe the trust’s long-term results from this policy will be superior to those attained by most investors—whether pension funds, institutions, or individuals—who employ high-fee managers.

Warren Buffet, 2014

Why you should not pick individual stocks

Maybe you are thinking, “I am smart. I can pick winning stocks because I have made many good choices in my life.” History has shown that most people fail at the stock market because they try to pick winning stocks. No one can predict how individual stocks will do. A good example is the Domino’s verse Google story. Imagine that it is 2010. You are ready to start investing and you are presented with a choice between two stocks: Google or Domino’s Pizza. Where do you put your money?

Most people would say Google. 

“However, in reality Domino’s share price growth has outperformed all of the world’s largest tech companies so far this decade. An investment in Domino’s at the start of 2010 has grown by more than 2,000% to date, leaving the likes of Amazon, Google, Facebook, and Apple in the dust.”

This is why index funds are the way to go. 

What is an index fund? 

In case you don’t fully understand what index funds are: a “stock index” is basically a list of big-name stocks for large, established companies (think Exxon-Mobil, Microsoft, Verizon, etc.) You take an average of all the stock prices in this list, and that gives you a number that’s kind of a thermometer for the stock market as a whole. When people say ‘the stock market is up today”, they usually mean that most or all of the popular stock indexes are up such as the S&P 500, the Nasdaq, and the Dow Jones. 

An “index fund” is, in a basic sense, like paying a broker to buy all the stocks on a particular index (the S&P 500 is a popular choice). You send him $1000, and he splits is evenly between all the stocks on that index. This is an easy, low-cost way to follow the ups and downs of the market without having to make any decisions about which stocks to buy yourself. When one company fails in an index, it is replaced by another, better performing, income generating company. 

The stock market has grown an average of 10% a year since its inception in 1926. Just by buying and holding index funds, you get to be part of this story and an average gain of 10% a year (as long as you don’t sell). You need to allow time to work its magic and for your money to compound. 

The purpose of an index fund is to allow an investor a simple way to own some segment of the market in a predictable way that doesn’t require the investor to constantly adjust their positions. The index does that work for the investor, buying and selling whatever is in the basket according to the “rules” the index established when it was formed. Because the index is “rules based” and doesn’t have a human being in the loop making decisions, and thus doesn’t have to pay a manager an exorbitant fee to manage the index, the overhead costs of index funds are quite low compared to other kinds of investments.

How do I invest in an index fund? 

First, you must open an account with a brokerage. I use Schwab, many people love Vanguard, and I have heard good things about Fidelity and T.Rowe Price. When choosing an index fund, you main concerns are consisent and steady growth over time and low fees. 

PAY VERY CLOSE ATTENTION TO THE EXPENSE RATIO. To understand what a massive effect these will have on your money, use this calculator to compare expense ratios: https://www.bankrate.com/calculators/retirement/mutual-funds-fees-calculator.aspx

A fund like VTSAX, through Vanguard, has an expense ratio of .04%. If you are paying more than this, it could cost you a half-million dollars (or more) in lifetime earnings. 

If you want to learn more, send me an email at: seanemccormick@gmail.com or browse through more resources below: 

Further resources: 

Personal finance websites geared to doctors: