One of my big financial regrets is not having had a good plan for my money when I started my first attending job. My salary increased by about 150%, and I wanted to be sure I made the most of it. Finding the right balance of saving and splurging (or taking care of things I had put off for years because of I couldn’t afford it), was pretty stressful for me.
At the time, personal finance blogs, let alone physician 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 doctor blogger financial rules of thumb to my first attending year, and see how I did. Since I did not have as much student debt as seems to be typical these days, I also will see how these numbers might look a PCP just starting out with 6-figure student debt.
Last week, I ran my numbers through the 50/20/30 rule. I will use the same numbers, so I didn’t list everything below. Feel free to go back and look at the post if you think I have left out half my budget in this post.
I have been asked by my spouse not to share super-exact numbers, so what you will see are my real numbers from long ago, adjusted to 2019 dollars. 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 financial rule (or challenge)
Physician on Fire posted a challenge a while ago, the challenge to live on half. He shows that if you live on half your salary, you will be financially independent in 15 to 20 years. His post has charts for doctors (earning $200,000 to $500,000 yearly) who save 50% of their post-tax income, and live on the rest. Depending on the rate of their investment returns, they can cover their living expenses with their investments in anywhere from 14.2 to 19.4 years.
I note that the lowest paid doctor in this example still makes more than I did (in 2019 adjusted dollars) when I first started out.
And that his hypothetical doctors are all married with 2 tax deductions children to help reduce the tax burden.
Using my retrospectoscope, I wonder how I would have fared had I tried to meet the PoF challenge as a new attending.
reviewing my numbers
As a reminder, I was earning 141,500 yearly in inflation-adjusted dollars.
After taxes, but before retirement savings, I took home $3579 every 2 weeks. Twice a year I had 3 paychecks a month, but for the most part I’ll assume 2 paychecks a month.
The 2 extra paychecks can be split evenly: one for savings, one for splurges. Conveniently enough, 1/12th of a paycheck comes out to $298, or the amount I spent on a comfy chair (in inflation-adjusted dollars; I certainly have never spent $3500 on a piece of furniture in my life).
Based on this challenge, my goal would have been to live on $3579 each month.
Referring to my last post on the subject, I reviewed my monthly spending and removed the $298 for my chair (assigning it to the “bonus” paycheck). I also removed the $598 per month I spent on paying off my student loan, as PoF thinks it’s fair game to count paying off your student loans under savings (it increases your net worth).
After that math, I spent on average $5058 per month, or well over 50% of my take home income.
That’s not even counting the new-to-me car I bought, to replace the one that died in the parking lot at work. (I had saved for that, so I’m not sure quite where to categorize that expense.)
If had thought about accepting the live on half challenge, I would have had to cut $1479 from my spending, and save it instead. Looking at some of the categories with more, shall we say, give in them, I can see some targets for budgeting:
- $1885 on rent
- $405 on phones/cable/internet/entertainment
- $163 on appearance related costs (though I did really need to build my wardrobe after residency)
- $104 on Starbucks (yes, the latte factor is an issue)
- $55 on eating out
- $91 on books
- $275 on miscellaneous
- $134 ATM withdrawals
- $440 on travel
I imagine I could have split my apartment with a roommate and saved $900 per month (or found a much cheaper one), reduced my travel by $200 a month (a lot of it was flying home to see family more than twice a year), figured out how to make a caramel macchiato at home (maybe saving $50?), used the library more (save $40 to $90), and cut or shared the cable bill ($50). I seldom bought clothing at full price, but I suppose I could have purchased fewer items. The cash and miscellaneous might have some potential savings there too.
With all that extra money for saving, I could have put aside perhaps another $1300, saving a total of $3419 each month ($598 monthly to loan repayment, $643 each month that got “saved” but eventually spent, plus $439 to my 403(b) each paycheck), plus the one time paycheck of $3579 (or $298 per month).
Had I saved all that extra money ($1300 + $643+ $298; and after the loan was paid off, also $598)–well, a compound interest calculator tells me if I could get 6% a year, that money would be worth about $140,000 at the end of 4 years. That’s in addition to what was saved in the retirement fund.
I will say that I loved my apartment, and being able to go home to see my family more often. I don’t know that I regret most of the other fluff in that budget, even if I am trying to get rid of some of those books (but not all of them!) many years later. However, if someone had told me I could have an entire year’s salary saved after 4 years, in addition to saving for retirement and paying off my student loan, I might have reconsidered getting a roommate.
How do these numbers stack up for a new graduate?
One of the interesting things about playing with these numbers, is that the challenge to live on less doesn’t really change much if I were saddled with typical student debt.
As I noted last week, if one refinances the median medical student debt of $192,000 at 3% (what I find advertised on refinancing websites this month), now we need to account for $1854 a month of debt payments. Since I already counted my $598 per month loan payment as “savings,” that means that the other $1256 of debt payment would also go into “savings.”
After 4 years, a recent graduate making no extra payments on their loans still would have paid down their student debt significantly (though they would still owe $120,000), have about $46,000 in retirement savings, and also about $51,700 in investments.
What it does mean is that the little luxuries that I enjoyed–living on my own, getting new clothes that fit properly after residency, buying books and coffee–would now have to be quite limited.
Looking back, I highly doubt I would have wanted to accept the challenge to live on half. However, had this been put forth as a strong suggestion, I suspect I could have found ways to save more than I did. Saving 40% instead of 20% would have turbocharged my savings, and most likely would have made a huge difference to my financial picture more than a decade later. I suspect I would be much closer to financial independence than I am now.
What do you think about building a budget around the Live on Half challenge? Are you surprised at how little of the “doctor lifestyle” could be lived on half a PCP’s income?