One of my big financial regrets is not having a better plan for my money when I started my first attending job and finally started making the big bucks. Which, since I went into primary care, wasn’t all that big an amount compared to what other specialties can make.
At the time, blogs weren’t quite as much a thing, and personal finance blogs weren’t nearly as easy to find as they are now.
I thought it might be interesting to apply a few of the financial rules of thumb to my starting salary, and see how I did. I will also think about running similar numbers of someone starting out in 2019.
The financial rule
I first heard about the 50/20/30 rule on MSN Money, in a series written by MP Dunleavey. It actually seems to have started with Elizabeth Warren (yes, the Senator), and features in a book she wrote with her daughter, Amelia Warren Tyagi. The book is All Your Worth (non affiliate link), and I think it is worth a read either if you are feeling a little stretched in your budget, or really have no idea where to start budgeting for a new job/new life.
Simply put, the recommendation is that of your after-tax income:
- 50% should go towards your needs: housing, utilities, transportation, basic food, required payments on loans. The sorts of things you really have to pay every month, or else you will be in big trouble.
- 20% should go towards savings: an emergency fund, retirement savings, a down payment fund for a house, extra payments towards your loans.
- 30% should go towards your wants: nicer groceries, eating out, vacations, treats. These are things that can be cut if needed, but hopefully make your life more pleasant or fun.
If your needs, or required payments, far exceed 50%, it makes life feel pretty tight. The authors suggest that keeping a good balance of needs and wants help a person feel less stressed about their finances.
They are focusing on people who already are watching their money, and aren’t likely overspending on luxuries (wants). For the person or family whose balance of needs and wants (let alone savings) are out of whack, they suggest either finding ways to reduce needs–cheaper housing, shared housing, cheaper transportation options–or earn more, while keeping the amount of your needs constant, or reducing if possible.
I could really have used this guideline starting out because, to be frank, I was anxious about whether I was saving enough. When my salary increased by 150% from residency, I wanted to make sure I made the most of it. I had a late start in medicine, and didn’t want to blow my big chance. On the other hand, it seemed silly to live as cheaply as before, now I was making so much more. Finding the right balance of saving and splurging (or taking care of things I had put off for years because of money issues), was pretty stressful for me.
Anyhoo, let’s take a trip in the way-back machine to review what I ended up doing with my new attending salary. I am going to look at my first full calendar year.
I have been asked by my spouse not to share super-exact numbers, so what you will see are my real numbers figured in 2019 dollars. Salary, rent, taxes and costs will be in 2019 dollars but based on what I spent all those years ago. So if something doesn’t seem right to you–say you think my medical expenses are absurdly low–it might be because medication costs have gone up more than overall inflation.
the numbers
My initial salary out of residency converts to $141,500 in 2019 dollars. I suspect that isn’t far from what is offered to brand new doctors today to practice outpatient internal medicine. I was eligible, in theory, for a production bonus, but I didn’t get one; it’s pretty tough for a new grad to get a bonus in their first year in practice. Going forward, it is reasonable to expect a bonus, though we can certainly talk about how silly it is to count on money which isn’t guaranteed.
Looking at my records, I actually took home a biweekly paycheck of $3579, before taking out pretax retirement contributions. Using the 50/20/30 rule (and ignoring the 2 extra paychecks I would get a year), it would be reasonable for me to budget
- $3579 for my needs each month
- $1431 for savings each month
- $2147 for wants each month
Looking back at what I did, I spent the following on needs:
- $1885 on rent
- $212 on utilities (water, heat)
- $215 on disability insurance
- $175 on taxes
- $58 at the pharmacy (medications and non-prescription items)
- $107 on gasoline
- $277 on my other car expenses (including repairs, a car rental when my car died, insurance)
- $216 on groceries
- $598 on paying off my student loan
For a total of $3743, or 52% of my take home salary most months. Very close to the recommended 50%.
I spent the following on wants:
- $405 on phones/cable/internet/entertainment
- $198 on charity
- $48 on gifts
- $163 on appearance related costs (clothes, shoes, hair salon, etc)
- $104 on Starbucks (the latte factor is a thing!)
- $55 on eating out at other places
- $91 on books
- $275 on miscellaneous
- $134 ATM withdrawals (unclear what that went to)
- $440 on travel
- $298 on a big comfy chair (which I still have)
For a total of $2211. That’s 31% of the salary, very close to the recommended 30%.
For my savings, once I was eligible, I contributed the max to my 403(b), which reduced each paycheck by $439, and represented 12% of my take home pay. I also put $643 into my savings account (9% of take home pay), which got used by the end of the year to fund some of the big ticket items (comfy chair included). This comes out to 21% of take home pay in savings.
I also bought a new to me car that worked, after the old one gave up the ghost in the work parking lot. In today’s dollars, that car cost me $24,400. My prior car had been quite unwell for some time, and I had been putting money aside for a replacement. I don’t know if I should really count the expense as though I was paying for it out of pocket, since I did have some money saved. In any case, since I paid the money that year, I will count it: the cost comes out to $2033 per month, or 28% of my income.
If you are still following along, you can see that my numbers don’t really add up. I’ve spent 123% of my monthly income, except that I left out 2 of my biweekly paychecks. (I decided not to count the 9% that went towards savings, since it got counted again when I spent it). Also not included here is the money I received from selling my house after residency, which basically paid for my car. If I don’t count the car, I have only accounted for 95% of my income. I’m clearly missing some records.
reviewing my numbers
Looking at my numbers, I feel like there is room for interpretation.
On the one hand, I spent more than I brought in that first year. This is a fail of budgeting, if the goal is to spend less than you earn.
On the other hand, I was able to save a little money in the months between the end of residency and the beginning of my first calendar year as an attending, which was spent during the year I’ve detailed.
More to the point, most of the excess spending was on one-off items that didn’t recur: paying off my student loan, and buying a car, which I desperately needed. Going forward, I had a nice gap between income and spending, which could be used to replenish my savings, and even be invested.
How do these numbers stack up for a new graduate?
Everyone has a different situation, so of course this is a generalization. However, if one assumes a similar starting salary and general expenses (i.e. utilities, gasoline, groceries), there is a big difference to discuss: student debt.
I was quite lucky to have a limited amount of debt, which I was able to pay off quickly.
However, if the median medical school debt in 2017 was $192,000, then paying off that much money will add quite a lot to the “needs” part of the budget.
Using an online calculator, I see that a 10 year loan at 6.8% means that a doctor would have to shell out $2209 each month to pay down the median debt. Refinancing to a 3.0% loan would reduce that payment to $1854. That’s 26% to 31% of the monthly budget right there.
That would suggest that I would need to reduce my other items in the needs column by at least $1250 per month to fit the 50/20/30 rule.
Looking at my expenditures, the best target is really my rent. I was living in a swanky townhouse apartment all by myself, probably the nicest place I’ve lived since leaving my parents’ home. (It had some amenities that are nicer that the attending house I live in now.) Had I had such large loans, I can see I would really have needed to pay much less, probably sharing the apartment, and maybe sharing a cheaper place.
I see a lot of “wants” that would be getting the axe as well. No comfy chair (I probably wouldn’t have had room to put it anywhere in my shared apartment anyway), probably less Starbucks and cheaper travel. On the bright side, with a roommate I’d probably be paying less (half?) for cable and utilities.
For sure, my replacement car would have been much less expensive.
What this says to me is that a newly finished resident with typical med school loans, who wants to go into primary care, needs to be prepared to live pretty cheaply until those loans are paid off. Which is probably something they knew already.
I think applying the 50/20/30 rule could probably be very helpful in those first few months of a job. Picking the right apartment (that is to say, the one with the right price) is key. As is choosing a car, if needed, at the right price point for the budget.
What do you think about using the 50/20/30 rule to build a budget? Are you surprised at how large a percentage of a PCP’s income would go to paying off student loans?