My Conscious Spending Plan

This is a post on personal finance inspired by Ramit Sethi’s I Will Teach You To Be Rich. In this series, I am documenting my attempt to put the techniques in his book into practice.

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!

IWT Challenge: Eliminate Remaining Debt

This is a post on personal finance inspired by Ramit Sethi’s I Will Teach You To Be Rich. In this series, I am documenting my attempt to put the techniques in his book into practice.

I was in a decent amount of debt a few years ago, mainly from credit cards and a car loan. It started a few months before medical school and tailed off around the end of my second year. At that point, I got a small job on the side, made a budget, and stuck to it for about 14 months until all of my debt was paid off. This was no easy task considering I had a fixed student income. After the debt was paid off, my budget-spending relaxed somewhat, but I was able to curb my spending enough to keep myself out of debt. I did learn a valuable lesson about being in debt. It’s soul-sucking, and I never wanted to be in it again.

Unfortunately, the problem arose again recently during the tail end of medical school, although not nearly to the same extent. My student loans only covered living expenses through the end of May, and my first paycheck did not come until the end of July. I built up a small amount of credit card debt from moving expenses and living expenses that absolutely have been curbed by the fact that I read I Will Teach You To Be Rich. I am also proud to say that I did not take out any residency interview and relocation loans.

After getting my first paycheck, I eliminated this debt by foregoing some savings for one month, specifically saving for long-term investing and pre-paying my student loans. While I am disappointed that my investments will suffer, I am happy that this debt is small enough to be easily eliminated.

I’ve taken a few precautions to avoid future debt mishaps. I started an emergency fund, and my goal is to slowly save enough to cover three months worth of my new salary. This is a bit slow-going at the moment since I’m simultaneously trying to save for a wedding during the next year. I also took Ramit’s advice and added a “Stupid Mistakes” entry into my Conscious Spending Plan. He recommends adding a buffer of 15% of your fixed monthly costs that can be used when you forget to save for or budget for something. I plan to transfer the remainder to a separate savings account. Every six months or so, I’ll figure out what I should do with the excess. I’ll probably transfer most of it to my emergency fund and spend a little!

I’m doing my best to stay out of debt in the future. Unfortunately, med school loans are my next major soul-sucking debt. If you or someone you know is in debt, suggest they change their behavior to get out of it as soon as possible. Give them a copy of Ramit’s book, or even just talk to them about their debt. Many people think they can’t get out of it. Others don’t even understand that it’s a problem. It takes discipline to pay off debt, but only then can you start to plan a secure financial future.

Automating Bills Using Online Bill Payments

This is a post on personal finance inspired by Ramit Sethi’s I Will Teach You To Be Rich. In this series, I am documenting my attempt to put the techniques in his book into practice.

On Ramit’s recommendation, I have a Schwab High-Yield Investor Checking account, which offers a bunch of great features. One of them is “free online bill pay.” It’s funny because my old checking account also touted this feature. It was something I heard and promptly ignored. Ramit’s book suggested using this free feature to automate paying most of my recurring monthly expenses.

My problem was that I never really realized what this “online bill payment” service actually is. It’s basically a service that you can use to make payments to nearly anyone in the country without having to write a check. For some reason I was under the impression that this meant I needed to know information about their company’s bank account, and I had no intention of calling my utility companies to find out that information. In reality (at least with Schwab), bills can be paid in a number of different ways. Often times, utilities and a bunch of other companies supply their account information to banks in order to facilitate electronic bill payment services. I assume this is because it means the company then gets regular on-time payments. In Milwaukee, I can pay my Time-Warner Cable/Internet and electric bills this way, in addition to many other services that I don’t use. I just have to put in some basic information and my utility account number. However, you can use bill payment services to pay basically anyone. If Schwab doesn’t know the company’s (or person’s) account information, they mail a check that will arrive by the date you specify. So for example, let’s say that you pay your child’s babysitter $200 per week. You could enter her name and address into the bill payments center and then you could pay her using bill payments. She would receive a check in the mail on whatever dates you specify.

There are a few different ways to make payments. First, you can manually enter in a payment amount and payment date. This is obviously useful for bills that are for different amounts every time or ones that don’t need to be paid regularly. Second, you can set up automatically recurring static payments. This is really useful for something like rent. Enter your landlord’s name and address, and ask the bill payments center to make sure that your landlord receives a check by the first of every month. Since the Account Number field is customizable, you can enter your address as an Account Number and it will appear on the check. I just set this up for my landlord, and I’m truly excited about never having to worry about paying my rent on time again. Third, some utility companies and credit card companies can forward you e-statements and e-bills through the bill payments center. In this case, the bill payments center knows how much you owe every month, so there’s no need to enter it manually. You can direct it to pay all or part of your bill every month before it’s due, even if the amount changes.

Money Wheel

CC-BY by Andrew Magill

Before I continue, let’s address the elephant in the room. You’re sitting there saying to yourself, “Man, it would be great to never have to worry about paying my rent on time, but I’m afraid I won’t have enough money in my checking account to cover the check.” I know this because I can hear Sadie worrying out loud about it to me. It’s a valid concern, but it’s not as big of a deal as you might think. The bill payments center has customizable reminders. You can use them with or without automatic payments. Meaning, you can have the bill payments center send you an email on the 20th of every month to remind you to pay your rent. You can then manually log in, check your account balance, and then manually submit a payment afterwards using the bill payment center. Alternatively, you can set up an automatic payment but still have them send you a reminder. The reminder would be your bank sending you an email saying, “Hey, we’re sending out a check in a few days for $900 to pay your rent. Let us know if you want to change that.” This would remind you to log in and make sure there’s enough money in your account. If you realize that your account won’t have enough to cover the check, you can also cancel the payment before it’s sent and make alternative plans for paying it. You can also make changes if for some reason your bill is different from normal this month.

Of course, if you use Ramit’s automation plan, you shouldn’t be too worried about not having enough money in your account. He advocates changing all your bills’ due dates to early in the month so that your bills get paid right after you do (assuming you get paid on the first of the month). But mistakes do happen and fortunately he also discusses techniques to get things like overdraft fees waived if you make a rare mistake.

I do worry about delays with the mail and postal service holidays, so I simply make my payment arrive a few days before it’s due. If you’re worried about automating something that could potentially become too big of a bill, like your credit card, adjust your payment if you have to. In the long term, try to identify and rectify why you’re spending more than you’ve budgeted.

This automation makes me genuinely excited about getting started with paying my bills. It also helped me understand the brilliant online bill payment system. This is going to make paying my bills much easier, and more importantly it will relieve the stress of always wondering if I forgot to pay a bill this month. My bills will be paid automatically, so I won’t even have to think about them. What a novel idea! This stress relief will be a major advantage during residency because thinking about bills is the last thing I will want to do with my time off.

Bills automated: Rent, Internet, and Credit Cards (Sadie pays for power). Anything that’s not automated is paid via credit card and the credit card is paid off in full every month.

Overall, I can see this system working very well for me. In addition to just being easier, the automation will help make sure that I never miss a payment. As residency gets more intense, it will be more likely that I’ll forget to send in a rent check one month or miss a due date for my Internet bill. Automating everything means that will never happen. Since we’re paid monthly, I am scheduling all of my bills to be paid a few days after I am paid. That way there is always enough money in my account to cover my bills. I am also finalizing my plans for saving and investing, which will happen automatically too. And finally I am finalizing my Conscious Spending plan, which I’m working on putting into practice this month. These are all topics for future posts though.

Do you have comments, questions, or objections about something I’ve described? If so, let me know in the comments!

Personal Finance: In Theory And Practice

It’s about time I start putting some of what I learned in Ramit Sethi’s I Will Teach You To Be Rich into action. In order to keep myself more honest, I plan to blog about my experiences. If that’s helpful to anyone, it’s all the better. These posts will come at various points throughout the year. They will highlight what I’ve learned and how I am applying it, challenges I face along the way, and my successes and failures. They will also include my commentary on how well or poorly Ramit’s techniques work and whether I’ve discovered any useful insights about putting his techniques into practice.