About a decade ago, I had my first doctor-client. And part of what they wanted to discuss was budgeting in order to save more. They just got new jobs and wanted some general planning for the sake of making good decisions.
Software for budgeting and spending history didn’t exist the way it does now. I wanted to provide the best help I could on this topic, and I knew about budgeting, but only from combing through months of bank and credit card statements to formulate consistency and patterns, if any. So I asked the couple for the last three months of bank statements and credit card statements; I analyzed and spreadsheet-ed the data. It took me hours. I ended up rendering some good advice, and I helped them shape up their habits to decide what balance of necessity and frivolous was healthy.
Looking back, I had the concept of budgeting all wrong, especially for a physician. I shouldn’t have been pouring over what was spent, and I shouldn’t have been analyzing the past. Those concepts help for creating a budget to minimize expenses, which can be super helpful. If there’s more month than paycheck, that’s totally the way to go. But this was different. A budget for savings should be much simpler.
Don’t approach the budget from the expenses first. Rather, approach it from savings first. Think of it as a top-down approach. It goes like this: how much should you save? 15-20% or more, if possible. Decide how much you can start saving, say 12%. Save it first. What I mean by “save it first,” is save the money before you spend a dollar. If you have already saved (because the purpose of a budget is typically to save more), then can’t you, theoretically, just spend the rest?
Here’s a visual example:
If your planning objective is complete — go celebrate.
There must be a certain equilibrium between saving and spending. Life in the present has value, so celebrate if you can, and do something special, like go out to dinner, take a vacation or weekend trip. Your future life has value, too. It’s OK to spend money on experiencing life, but only if you’ve saved first. That’s why it’s important to take the top-down approach and treat your savings like a fixed expense. Savings are the lifeblood of your future, so don’t add any unnecessary fixed expenses that will keep you from saving. Savings are your most precious resource, and you need to treat it as such, no matter how big or small. Saving is a skill you need to work on and improve, just like any other skill you develop; it takes practice.
So I encourage you to hone your savings skills and take a top-down approach instead of pouring over bank statements, wondering why you can’t save as much as you’d like. That exercise typically leads to procrastination anyway. Budgeting savings as a fixed expense before your spending is more effective and much more fun, which translates to action. And you don’t have to spend all of what’s remaining of the “Post-Budget Allowance,” but you can, and that’s OK because your future has already been accounted for.
Paul Morton is an investment advisor, Midwest Private Client Group.
Image credit: Shutterstock.com
