Residency to Retirement Resource Center
Residency to Retirement Resource Center
September 26, 2019
3 min read

A budget can keep millennial physicians' spending in check

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Sanjeev Bhatia, MD 
Sanjeev Bhatia
David B. Mandell, MD 
David B. Mandell

by Sanjeev Bhatia, MD; and David B. Mandell, JD, MBA

New physicians are often disappointed with their bank account when they start their first jobs, even after several months of being in practice. Considering that they patiently accepted a lower income during residency and fellowship, it is not surprising that new millennial doctors want to reach financial independence quickly, within a few years of starting in a practice.

Unfortunately, true financial independence often takes longer than expected due to the impact of taxes on a higher salary, debt burdens and an increased cost of living.

A lucrative new salary can be easily and inadvertently squandered without adequately preparing and adjusting for these expenses. It is no wonder some physicians, despite having income that is considered to be in the top 1% of all wage earners, never achieve financial independence because they misunderstand their cash flow.

A budget is a helpful tool that provides increased awareness of where money is being spent and how much is being saved. In this article, we discuss how developing a budget can be a valuable exercise to compare cash flow with fixed and variable monthly costs. Adhering to a realistic budget can help you avoid excessive spending and achieve your financial goals faster.

Step 1: Force yourself to think about budgeting

Although extra free time in one’s schedule is hard to come by, it is important to force yourself to spend time considering your cash flow in relation to your new job. In preparation for developing a realistic budget, gather your utility bills, bank statements, insurance premium information and credit card statements. Examine prior tax returns to get a good sense of how much money you actually earn after taxes. Use a spreadsheet to compare the numbers for expenses and adjust the budget accordingly in real-time.


Step 2: Keep your goals front of mind

Write down your short-term, intermediate and long-term financial goals. Consider whether you are trying to buy a house or if you need to save for partnership buy-in costs. Do you want to contribute to your child’s 529 college savings plan? What are your retirement goals? By committing these goals to writing at the beginning of the process, you keep your desired long-term picture in mind as you appropriate expenditures throughout your career.

Step 3: Estimate your cash flow

If you know your expected salary, you can start to estimate the monthly cash flow amount after taxes. Your previous year’s tax return may help you estimate how much you may pay in taxes and other costs. Be sure to assess your pay after you have contributed to your 401(k), IRA, Health Savings Account and other available tax-advantaged vehicles. As mentioned in another article for, maximizing contributions to tax-advantaged accounts not only lowers adjustable gross income, but the larger pretax dollar amounts give your investments more leverage than after-tax dollars in the same fund may provide.

Step 4: Estimate fixed, variable expenses

Using the statements, receipts and bills you previously gathered, separate out the costs that will be the same each month (fixed expenses) from those that will change monthly (variable expenses). For example, mortgage payments, utility bills and student loan payments are typically considered fixed expenses, and vacation costs and personal spending are often thought of as variable expenses. Do not worry if you cannot ascribe a set value to some fixed expenses. Remember, the budget is meant to be a rough guide of your spending to show you what you can afford.

Step 5: Develop a budget

Although it is tempting to want to spend all of your after-tax salary, it is essential to develop a habit of saving early to safeguard your financial future. Generally, fixed expenses should constitute no more than 50% of your monthly cash flow. Variable expenses should not exceed 25% of income. The goal each month should be to save 25% or more of your after-tax take-home pay to adequately achieve financial goals and prepare for unexpected events. Once your expenses and cash flow are known, these numbers can be adjusted accordingly to see how much you can spend in various areas of your life. Be realistic, as this will help you adhere to the budget you have developed.


Step 6: Review the budget regularly

Congratulations! You are in an incredible career and are blessed with tremendous earning potential. Look at your budget from time to time to make sure you respect your finances, but do not be afraid to enjoy the fruits of your hard work and have fun.

Without careful budgeting and understanding of actual cash flow, anyone who earns a high income, from a physician to a professional athlete, can easily squander it away. Developing a budget provides a better understanding of your finances and keeps your financial future safe.

Disclosures: Bhatia and Mandell report no relevant financial disclosures.