This is an update of a post from 2 years ago, which I ended up splitting into 2 parts, as the original was quite long.
Last week I reviewed the 50/30/20 plan as a framework for making your budget. That post ran long, too.
This week I offer the example of 3 fictitious interns, who use the 50/30/20 budgets in ways that suit their differing backgrounds and goals.
All of the interns in my examples are single, with an after tax salary of $4000 per month. That might not be you.
If you are married, or think you will make less (or more) than these doctors, I suggest you use a paycheck calculator to estimate your monthly take home pay.
A Quick Overview of the 50/30/20 rule
As a reminder, the 50/30/20 rule was described in a book called All Your Worth (non affiliate link), and recommends that you allocate your money in this way:
- 50% for your needs: Bills you must pay every month, or else you will be in big trouble.
- 30% for 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.
- 20% towards savings: an emergency fund, retirement savings, a down payment fund for a house, extra payments towards your loans.
Three very different interns use the 50/30/20 rule
I like clinical scenarios, much better than memorizing trivia or even general principles. So I think putting a few examples out here might be helpful.
Dr. L. K. Duck
L.K. graduated from medical school debt free, and has an old car that is paid off. He even has $400 in graduation money he was given by his grandparents. He knows he will be rotating at several different hospitals, and will need a car to manage.
He knows he can afford $2000 monthly for necessities.
He allocates $1200 to rent a 1-BR apartment (his first place without a roommate!) and $200 for utilities and insurance. His car is going to cost him $100 for gas, $100 for insurance and registration, and $100 for parking. He knows from med school he can manage on $300 a month for groceries. His parents helped him with registration for the year, so he isn’t counting it as a cost. His monthly totals for necessities comes in just at exactly $2000. Good thing he already owns his car.
As for savings, he knows he should allocate $800 a month.
He would like to have 2 months of savings for emergencies before he starts saving for other things. That means he will need 2 x $3200 ($4000 after tax minus savings), or $6400 saved. He will put all of his savings aside for 8 months, before moving on to other goals. He plans then to put aside $500 each month for a Roth IRA, and the rest ($300) in a car fund (to take care of repairs and/or a replacement).
He also has $1200 per month for wants.
He wants to have cell phone coverage ($60), home internet ($60), a streaming service for his time off ($20), beers with his co-interns once a week ($60), and the occasional take out ($100) . Two of his college friends are getting married this year, and he wants to send presents ($120 each, or $20 per month), even if he can’t get time off to attend. If he can go to those events, that will likely run him $1200 each, or $200 per month. He is definitely flying home for the holidays to see family ($450 or roughly $40 per month).
Even with those estimated costs, he still has about $640 a month for things he forgot to budget for (Boards?, a winter coat?) and things he might like to purchase: new shoes, a vacation, electronics.
L.K. has no problem finding things to spend his money on, but he knows he needs to watch the total, so he doesn’t spend more each month than he can afford.
Dr. Tiffany Spott
Dr. Spott did not have the advantages that Dr. Duck did.
She has a significant amount of loans: $230,000 in federal loans for school, and she also took out a private loan of $10,000 for away rotations, boards, and moving costs. This loan is on a 5 year pay off schedule, and her interest rate is 8%. She does have a hand-me-down car from her cousin with no car payments.
She knows she is supposed to allocate $2000 a month for necessities.
Her private loan is going to cost her $275 a month, and if she goes into REPAYE, a loan calculator shows she should set aside $374 per month (though because of the loan repayment holiday she won’t have to pay this amount for at least several months, maybe longer).
Living in an apartment on her own is going to push her budget for necessities well over her comfort zone, and she is tired of feeling like there isn’t enough money to go around.
Luckily, one of her med school classmates is going to be starting at the same institution. They aren’t best friends, but she thinks they can get along as roommates for at least the first year.
Splitting rent and utilities, Tiff’s share will be $800 a month, including renter’s insurance.
Her car will cost about $250 a month, though if she can carpool with her roommate, she might save a little on gas.
Adding up all of these necessities ($1699), she will still have $301 to pay for basic groceries and toiletries once she starts to pay the minimum on her school loans. Until then, she can either spend her extra $374 a month or, if she prefers, she can use that money to beef up her savings sooner.
Savings
Tiff has $800 to put aside for savings.
She would like an emergency fund, and she has a strong feeling her car may not keep running until she finishes residency.
She would very much like to pay off her personal loan. If she could, that would free up a lot of money from her monthly budget.
And she knows how important it is to put money aside for retirement. She is still young, but she is already behind on her savings compared to her friends who went to work right after college.
She has multiple competing goals, and not enough money to meet all of them at once.
After careful consideration, she decides to put aside $250 per month, every month, to a Roth IRA. She decides to split the rest: $100 each month to build her emergency fund, and the rest–$450 per month–towards the principal of her personal loan. Using a payoff calculator, this should shorten her payoff term for 5 years to just over 1 and 1/2.
If she decides to save most of her expected student loan repayment during the federal loan repayment holiday, she can end the year with somewhere between $1900 and $5400 in her emergency fund. The amount depends, of course, on low long the loan holiday lasts.
Wants
Dr. Spott still has $1200 a month to take care of her wants: a cell phone ($60), home internet service (which she can split with her roommate, $30), some new clothes ($75 per month, on average), regular hair cuts ($50, if she can find the time on her days off), charitable donations ($50 a month), even a luxurious winter trip to somewhere warm ( $150 per month).
Even with those estimated expenses, she still has $785 a month to pay for things she forgot to budget for, extra splurges, or even paying off her personal loan early. She has a good budget to allow for fun, because she has kept the cost of her necessities to 50% of her take home pay.
Dr. Prudence Averr
Dr. Averr has always been careful with money. She attended her state university and medical college, and left with lower than average loans, thanks to money her parents put away and several merit scholarships.
She is staying at her home institution for her intern year, before moving to a prestigious Dermatology residency in a higher cost of living city.
She has been splitting the rent on the 3 bedroom apartment with 2 other students, one of whom is staying on for her residency, and another who is an MD/PhD student who won’t finish for a few years. They are excellent tenants, and their rent hasn’t increased much since they moved in 4 years ago. The total rent is $1500 a month for all three of them.
Luckily (or maybe it’s not luck, maybe it’s good planning), the apartment is in easy walking distance of 2 of her 3 clinical sites. The third site is only a few miles away, a relatively cheap drive share ride away, if she can’t get a ride with someone.
Necessities: $2000
Pru will have to pay $500 per month for rent, and $45 per month for her share of the utilities and insurance. She estimates she will spend $100 per month (more some months, much less on others) on ride shares. She has some allergy issues, and knows she spends $400 a month of food already; she is a little worried she may have to pay more for convenience, and increases her budget to $450 per month for food. She spends $100 on toiletries and necessities at the pharmacy.
Using the REPAYE calculator, she sees that when the federal loan holiday is up, she will have to pay $374 per month on her $80,000 of loans. For now, she is putting that money into savings, but is mentally prepared to send that to her loan servicer once payments have to resume.
She still has over $400 to spare with this budget (mostly because of sharing an apartment and avoiding the expenses related to owning a car). She plans to put another $200 aside for unexpected costs, and save the rest for a deposit on her next place when she moves.
Savings: $800
Pru knows all about retirement funds, and she actually qualifies for a match in her residency 401(k). She will be matched 50 cents on each dollar she saves, up to 6% of her salary. Even better, she is allowed to contribute to a Roth 401(k), which means her contributions are after tax, but they grow tax free and won’t be taxed when she withdraws them in 30 to 40 years, when she expects to be in a higher tax bracket.
Therefore, she contributes 6% of her gross salary (about $300 per month) in her Roth 401(k), and puts another $400 per month into a Roth IRA.
She uses the remaining $100 per month to save for her move next June.
Wants: $1200
Pru has been very careful with her spending during medical school. She knows she should still be frugal, but would like to loosen up a little.
She uses a MVNO for cell service ($30 per month), and splits the internet bill with her roommates (another $30 per month).
She already spends a decent amount on groceries, but hopes to socialize with her co-interns. She puts aside $150 per month for that.
Now that she is making money, she thinks putting aside a little money for charitable giving is in order. She isn’t sure about giving 10%, but would like to start with $100 per month. She knows the student run free clinic she volunteers with could really make use of it.
She has been putting off some spending while she was a student living on loans, and wants to replace some things. She has nearly $900 a month to take care of this.
Her clothes are more suitable to a scruffy student than a professional woman, and she plans to go on a shopping spree when she gets her July paycheck, to replenish her wardrobe with new (to her) clothes to carry her through the summer and fall. She will do that again in late fall for winter clothes.
In August, she plans to get a new phone (unless there are sales in September).
She isn’t sure what to do with her extra money in those other months. She may buy a few fun things, save for a vacation, or even start investing it for the future.
What’s Your Plan?
If you made it all the way here, you must have some interest in budgeting well.
You may look at the different budgets for LK, Tiffany and Prudence, and think none of them would work for you, and that’s fine. A budget should address your goals.
If you want to put more to savings and less to your wants, you will come out ahead. If your wants and needs together total about 80% of your salary, you’ll probably be OK.
However, if you decide to spend a significantly higher proportion of your salary on your needs (rent, car, utilities) you may find yourself feeling stretched. I recommend using the 50/30/20 budget (or another plan that leaves some wiggle room) for a less financially stressful intern year.
What do you think of these budgets? Do any of these scenarios match your plans for your intern budget.