If anyone talks to Sadie, you might hear her grumble that I’m obsessed with personal finance now. I can see why she thinks that, and in some ways I guess I am. I do talk about it a lot more than before. But she also always sees me with my “budget” spreadsheet open. I can commiserate with the government on one thing. Balancing a budget is tough, especially when you’ve got a lot of debt.
As a resident, I make a decent salary, but my med school student loan interest eats about 33% of my take-home salary. I won’t go into the details of student loans now because I’m saving that for a future post. Suffice it to say that some of my loan interest will be subsidized for 3 years, but I’m still accruing over $800 per month just in student loan interest. Yuck! Now, I’m actually only required to pay about $500 of it, but I plan to pay the amount that’s accruing every month. If I don’t pay all of it, the amount of unpaid interest capitalizes every month. The last thing I want is for my gargantuan debt to snowball over the next 4 years of residency. So as you can see, my student loan debt adds a major expense to my budget.
Now if I were a smart person, I would have followed Ramit’s guidelines to make my Conscious Spending Plan. He recommends taking about 30 minutes to get a rough estimate of your budget using some general guidelines. He recommends allocating 50-60% of your take-home pay to fixed monthly costs, 10% to long-term investments, 5-10% to short-term savings goals, and 20-35% to guilt-free spending. I actually did do this, but he also recommends spending 2 hours refining your plan in order to optimize your spending. This is what has turned into a larger project.
Given that my student loan debt is so large, it skews my fixed monthly costs to greater than 60%. I also need to save for a wedding. More importantly, I had a budget worked out already from a few years ago. With some minor tweaking, it accounted for all of my regular expenses. But when I put it all together, things weren’t working. No matter how I crunched and tweaked the numbers, they never fell in line. Even worse, whenever I thought I had made it work, I would remember something that I had forgotten that would cause this house of cards to come tumbling down.
Having put so much thought and calculation into my plan, I now appreciate the simplicity of Ramit’s technique. It gets you moving past the details and into action. Regardless, my plan is done, and I’d like to share it.
I currently take home about 73% of my quoted salary after taxes and health insurance. That number is actually better than I was expecting. I believe Ramit suggests estimating your take-home pay as 66% of your quoted salary. For retirement savings, our residency program used to have a 403(b) plan, but they discontinued it this year because the residents weren’t really using it. Ugh. I highly doubt they provided any kind of employer match, so it’s no big loss. From my take-home pay, I allocate 10.70% to my Roth IRA.
[NERD ALERT] It’s more than Ramit’s suggested 10% because I’m using a technique I read about elsewhere. I’m actually dollar-cost averaging over the length of my residency. To do this, I’m using the estimated take-home pay that I will make as a PGY-4 (a few thousand dollars more per year) to determine my 10% investment contribution. This way, I will invest like I’m making my PGY-4 salary for the next 4 years. The proposed advantage is that I will invest a consistent amount over the next 4 years (plus an annual inflation raise), instead of investing more in 2015 when I’m a PGY-4. The actual difference is just under $30 per month, so it’s not a huge difference. If that’s all Greek to you, just skip over it. I’m basically investing 10% of my take-home pay. [/NERD ALERT]
I’m allocating 17.84% to short-term savings. This number is significantly higher than Ramit’s suggested 5-10% basically because I’m saving for our wedding. As he points out in his book, weddings are expensive. Although we’re set on having a lower-budget wedding, it’s still requires a lot of dough.
Next up are my fixed monthly costs. These come out to 64.07% of my take-home pay. This is slightly higher than Ramit’s suggested 50-60%, but considering it includes my $800+ student loan interest bill and my living expenses, that’s not too shabby. In fact, without my student loan interest, I’d be down to 38.52% of my take-home pay. Apparently I’m living frugally. I guess that was roughly my goal. Also, I set aside just under 10% of my fixed monthly costs for “stupid mistakes.” It’s just another great tip to make sure I don’t blow my budget.
Unfortunately with all the other categories getting “extra” money, my guilt-free spending really suffers. I’ve allocated a paltry 7.40% to guilt-free spending compared to Ramit’s suggested 20-35%. I could never imagine spending 35% of my take-home pay “guilt-free” unless my fixed monthly costs were really bare bones. As it stands, my fixed monthly costs include everything that I spend on regularly, including things that don’t get paid every month. This means that my guilt-free money is really for me to spend on things I want and enjoy, not a haircut.
So that’s my customized Conscious Spending Plan. I know it would’ve been smarter and easier for me to just use Ramit’s rough estimates and adjust my spending over time. But I have specific, time-sensitive goals that I need to meet and some data on my past spending habits. I saw no reason to throw that knowledge away just to fit his exact algorithm, which is actually a guideline to help you get started. And in the end, I didn’t end up too far off. I’m sure things will get adjusted as time goes on, but I have to say I’m happy with my plan. On the other hand, I do wish I hadn’t spent so much time on it. Now I need to leave it alone and just make sure I’m sticking with it. Sorry, Sadie!