Welcome back, to the financial pulse

In today’s lesson, we will be learning about budgeting.

Budgeting is the critical foundation to the financial house we’re building together. Since budgets are so important, we will spend two lessons learning about the topic.

Our objectives for this lesson are to:

• Define what is a budget and why it’s a crucial step in meeting your financial goals
• Explore common resident expenses
• Provide practical tips to get you started on a budget that works for you

• In the next lesson, we will:
  • Explore sources of resident income
  • Outline and calculate the difference between gross income and net income
  • Tie together income and expenses in an example budget

Animations of budget things – graphs, charts, money, achieving goals, etc.

• So, what is a budget? In its simplest form, a budget is a structured spending plan. On a more personal level, it is a values-based plan of how you want to allocate dollars you’ve earned to expenses you owe.
• While budgets can take a lot of upfront work, they are vital to meeting your financial goals. In fact, your short and long-term financial goals are what informs the creation of a budget. Much like you wouldn’t treat patients without clear goals of therapy, you cannot successfully develop or adhere to a budget without financial goals in mind

Animations of calendars, planning, over-spending, etc.

• A common misconception is that a budget is simply tracking what we’re spending over a period of time. But it’s more than that.
• Strictly speaking, a budget is developed in advance, and serves to allocate your income towards financial goals you’ve previously identified. Want to put $250 dollars towards your student debt every month? Well, to achieve that, it might mean you only have $45 dollars for coffee. So if it’s the 21st of the month and you’ve spent $45 dollars on coffee, it could be 9 sleepy days for you if the goal of debt repayment supersedes your need for caffeine.
• Budgets are generally prospective, but sometimes they can be retrospective in design. The term for this form of budgeting is “Spending tracking.” When following a spending tracking method, you check what you’ve spent money on at the end of the month. Since your looking backwards in time, you aren’t able to apply goals to your spending throughout the month, the same way you can with a more traditional budget.

• Let’s turn our attention to expenses. Very simply, expenses reflect everything you spend money on or allocate money to.
• Expenses are typically broken down into fixed and variable expenses.
  • Fixed expenses are those that either do not change month-to-month or are not easily manipulated
    • Common fixed expenses for residents include:
      • Groceries
      • Rent and utilities
      • Internet and phone bills
      • Disability, Life, and Critical Illness insurance
      • Line of Credit and Student Loan interest payments and credit card fees
      • CMPA fees, licensing fees, and licensing exam fees
      • … depending on your values, you might include things like gym memberships and music subscriptions in fixed expenses, too
  • Variable expenses are those that change or that you can more easily manipulate month-to-month
    • Variable expenses are numerous and truly depend on your values and priorities. Some examples include:
      • Eating out
      • Household necessities
      • Entertainment
      • Health & Wellness
      • Transportation
      • Education
      • Travel
    • Outlining variable expenses often takes more time because they are, by definition, so variable
      • For instance, you may include a specific category for coffee, if that’s what gets you through each day, or you may include categories for clothes or make-up or alcohol. Whatever fits into your life on a regular basis.
• Whichever way you breakdown expenses, it is generally best to be as accurate as possible so that you know exactly where you are allocating your money
  • To this end, you may break down categories like “Food” into groceries and eating out, or “Transportation” into gas, bus fare, and taxis/car-sharing
• Ultimately, the importance of accurately outlining your expenses is two-fold
  • First, it allows you to specifically allocate your income to expenses in a way that aligns with your values
  • Second, it ensures that you do not spend more than you earn!

• If building an expense budget sounds taxing, it can be! … but it is critical to enacting your financial plan
  • The beauty is that once it is developed, you will find spending becomes habitual and you will only require checking your budget once a month to ensure you’re meeting your goals – it’s all about making positive habits
• Here are a few tips to help you build a sound budget

1. PAY YOURSELF FIRST

• Strict budgeting can be tedious and time consuming, especially with balancing our demanding schedules in residency.
• The best first step you can do when building a budget is to “pay yourself first”
  • This means setting aside a fixed allocation of your income each month to your long-term goals. This is why the foundation of a sound budget is having specific financial goals.
    • If you want to pay off your student loans in 7 years, calculate how much money must be set aside each month to achieve that goal and then allocate those funds as a fixed expense
    • If you want to start saving for the future, set aside a fixed amount of money each month towards that goal and consider it a fixed expense

1. Once you have some goals in mind, start by simply tracking your spending for 2-3 months. Be as specific as you can with categorizing each expense.

• At the end of 3 months, you should have a pretty good idea of which expenses are fixed and which are variable, as well as where you personally spend more or less money. This will inform how you subsequently build your budget moving forward.

1. Budget for an “emergency fund”

• Life happens and sometimes you lose a tire on the side of the road. It’s important to have some money allocated in your budget for large and unpredictable expenses. $200 might be a reasonable place to start.
• Paying yourself first can relieve much of the stress of creating a detailed budget because you have prioritized setting aside money for the bigger picture. Whatever is left over can be allocated more easily as you see fit. This type of budgeting is often termed “reverse budgeting.”

• In summary, today we’ve learned about budgeting and, in particular, why budgeting is such an important part of meeting our financial goals.
• We encourage you to get started on your budget today by tracking your spending habits.
• Stay tuned for our next lesson on income allocation and reviewing a sample budget!