You can money do four things with money – Save It, Invest It, Spend It, or Give It away.
The problem with most of our finances is that we don’t have a real plan on how to manage our finances.
We Stumble Into Our Finances
We add a checking account here, and then a savings accounts there. We might have some loans from undergraduate school or medical school. You might have a retirement account leftover from another job or the one from residency.
Before you know it, you have a smattering of accounts, assets, and liabilities that just kind of “work” because you keep adding to them.
We have all these things for a reason, but the reasons have changed from when we first started our journey. There was no overall plan because we were just too busy trying to get into medical school, getting through medical school, getting into residency, surviving residency, and starting our first job, that we didn’t take the time to get organized.
Let’s Get Your Finances Organized for the Start of the Year.
The following 5 Things will get your finances tuned up for the new year.
1. Calculate Your Net Worth
Your net worth is your assets minus your liabilities. A financial asset is something that has financial worth – like a bank account, real estate, or your retirement account. A financial liability is somethings that you owe money on – like a school loan, car loan, or a credit card that you have not paid off.
The net worth will actually be a negative number for most medical school students and residents because you have not acquired assets and you probably have large student loans.
The reason why you calculate this number is so that you can track the progress of your net worth. As you pay off loans, add in retirement accounts, and do smart things, you’re net worth will increase.
Even though we have paid for vehicles, I leave them off the calculation, along with other things like bikes, furniture, clothes, etc. I tend to focus on big things like banking/retirement accounts, and any loans.
Keep this calculation simple and consistent so you can track your wealth-building over time.
2. Review Your Banking Structure
Now that you know all your assets and where they are kept, you know your banking structure.
Where do you have all your loans?
How many bank accounts do you own?
How many credit cards do you have?
Consider eliminating some redundant bank accounts if you can simply.
I personally really like Ally online bank with its bucket system. Ally offers checking, savings, and investment accounts. With Ally, you have one savings account, but it can be divided into up to 10 buckets for savings for your emergency fund, saving for a downpayment on a house, or saving for home taxes. You can decide how much to put into each bucket. You can change the names of the buckets anytime as your needs change.
3. Manage Your Cash Flow
Cash flow is simply how money comes to you, moves through your banking structure, and then what you do with it. You will feel like you got a raise when you start to use cash flow planning because your money just got more efficient.
You can see how money flows from your paycheck to your spending and goals, once your banking structure is organized.
Are there redundant places where the money goes?
Can to simplify some of your spending?
Is this the year for you to start using a budget? The less money you have, the more likely you need a budget.
A. If you are new to Budgeting , Start by Tracking Your Spending
Use the hawthorn effect to affect how you spend money. The hawthorn effect is that when you know you are being watched, you change your behavior. Paying attention to your spending is the first step in learning how to control it.
B. Build a Monthly 50 – 25 – 25 Based Budget
I recently changed to this method of budgeting, because it works so well. I have to give credit to Ryan Inman at Financial Residency for the 50%-25%-25% structure. I somewhat modified it here, but the system works well. This structure helps you put boundaries around how you spend your take-home pay.
If you are a resident, then your 50-25-25 will be
50% to fixed expenses, 25% to variable expenses, 25% to increasing your net worth
If you are an attending, then your 50-25-25 will be
50% to living expenses, 25% for future spending, 25% for growing net worth.
If you are a single med student, then your budget will look more like a 75 – 25 budget
75% going to living and school expenses, and 25% is saved for upcoming expenses like applying for residency programs and traveling for interviews (if we do that again).
C. Build an Annual Budget
Once your monthly budget is in place, then build your annual budget. What are the things that come once a year or once every several years? This can be your home taxes, or perhaps your disability insurance. (If you can pay your disability insurance once a year, sometimes you can get a discount on your insurance.)
4. Build Your Emergency Fund
The standard for an emergency fund is to have 3 to 6 months of living expenses in cash, in a saving account.
You will know how much it costs to run your financial life each month.
Save up your emergency fund so that you have a way to pay for the emergencies that come along.
Emergency fund Caveats:
1. A small emergency fund is better than no emergency fund. Even starting with $1000 in a bank account is a step in the right direction.
2. If you have credit card debt that is being carried over each month, then that is your emergency. Get your $1000 in your emergency fund, then start paying down the credit card.
3. Residents should aim for a 3-month emergency fund, which will cover most of your emergencies.
4. Attendings should aim for up to 6 months of an emergency fund. Much more than that, and you will run into “cash drag” on your savings whereby you.
5. Retirement Accounts
January is a great time to also check out your retirement accounts.
1. Are you reaching your goals for your retirement account?
Perhaps you thought you were maxing them out, but you have not increased your paycheck contributions.
If you are not putting enough into your employer retirement – 401(k) or 403(b) – to get the match, perhaps you should.
Is this the year to start your direct Roth IRA if you are a resident under the threshold?
If you earn less than $125k (single) or less than $198k married, then you can contribute up to $6,000 if you are under 50 y/o.
If you are over the income limits, is this the year to start your Back Door Roth IRA?
New to managing your personal finance? Just start at the top and work your way through. What are you going to do this year to get your finances in shape?
If you liked this article, I have a whole book on personal finance that will help you build your wealth. I am publishing the second edition of my personal finance book in early 2021. If you would like to be on the mailing list to get the launch sales price, please sign up here.