Author Topic: Advice and budget critique for a newbie!  (Read 5403 times)

pumpkinlantern

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Advice and budget critique for a newbie!
« on: June 17, 2013, 07:17:27 PM »
Hi everyone,

I am a single gal in my late 20s who is very un-educated about money, but trying to improve.  I have recently discovered MMM and I like the philosophy of "efficiency" and aligning money expenditure with personal goals and not blindly following the masses.  Although I like my job/career, I would like to eventually be financially free mostly so that I can make choices based on what I want to do rather than based on what I need to do for money.

I'm currently in subspecialty medical residency, so I have a LOT of medical school debt.  It comes up to -$67,000 in interest free debt for the duration of my residency and -$55,000 in line of credit debt at prime (currently 3%).  I will be in-training for about 5 more years with a salary around $57,000 (net) and then my salary will likely jump to around $250,000.

I went through all my expenses and salary for the last year and this is what I have been spending:

Monthly
Rent (includes utilities, gym) 1600
Parents (they didn't plan very well for retirement) 500
Interest on debt 160
Clothing 65
Dining out (including coffee, breakfast after being on-call) 130
Entertainment 30
Gifts (everyone seems to be getting married!) 100
Groceries 170
Home repairs, etc 30
Miscellaneous (everything I want, not need - toiletries, makeup, camera, etc) 160
Transportation (no car, I walk most places, so this is occasional public transportation or taxi ride late at night) 30
Phone 30
Internet 30

Yearly
School (fees, examinations) 1700
Computer 1300
Travel 8000

Total $47,000.

My net income was $57,000 so I saved about $10,000 this year.

What suggestions do people have for me in the future?

The rent is non-negotiable at this point (complicated story) although I do live in a central location, so I do save a lot on transportation costs.  I live a cross-country flight away from my family so living at home is not possible.  Money for my parents is non-negotiable for me.  Interest on debt is something I can't change (although obviously, the more I pay down the more that will decrease).  School fees is not something that can be changed.

I'm thinking that I can probably cut down on the eating out expenses (it's the morning after being on-call that kills me - my ability to resist getting a greasy breakfast sandwich is severely hampered by sleep deprivation).  Also, I should be able to reduce the miscellaneous expenses a bit more.  I really love travelling and it hurts me a little more to give this up than my other luxuries - and I love the fact that I can do it when I'm young and unattached, but now that I write it down in a budget format, it seems ridiculous to spend 14% of my income on travelling.

Thoughts?

Also, what are thoughts on paying down debt vs. investing?  My debt is huge, and so far I've been repaying debt, but it's at 3% and maybe it makes sense to open a TFSA (Canadian equivalent of a Roth I think) and just buy simple index funds?

jpo

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Re: Advice and budget critique for a newbie!
« Reply #1 on: June 17, 2013, 07:21:48 PM »
You should not be spending $1300/year on computers.

pumpkinlantern

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Re: Advice and budget critique for a newbie!
« Reply #2 on: June 17, 2013, 07:26:40 PM »
You should not be spending $1300/year on computers.

Thanks - you're probably right.  Although my last one before this did last me 9 years, so hopefully this one will last me as long!

michaelrecycles

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Re: Advice and budget critique for a newbie!
« Reply #3 on: June 17, 2013, 07:46:30 PM »
I went through all my expenses and salary for the last year and this is what I have been spending:

Monthly
Rent (includes utilities, gym) 1600
Parents (they didn't plan very well for retirement) 500
Interest on debt 160
Clothing 65
Dining out (including coffee, breakfast after being on-call) 130
Entertainment 30
Gifts (everyone seems to be getting married!) 100
Groceries 170
Home repairs, etc 30
Miscellaneous (everything I want, not need - toiletries, makeup, camera, etc) 160
Transportation (no car, I walk most places, so this is occasional public transportation or taxi ride late at night) 30
Phone 30
Internet 30

Yearly
School (fees, examinations) 1700
Computer 1300
Travel 8000

Total $47,000.

My net income was $57,000 so I saved about $10,000 this year.

What suggestions do people have for me in the future?

How about clothing? Hopefully, you have (or soon will have) amassed a wardrobe of quality items that will last, and purchases become more sporadic than recurring.

How much traveling did you do on $8k? Maybe you can find some cheaper ways to travel?

Also, what are thoughts on paying down debt vs. investing?  My debt is huge, and so far I've been repaying debt, but it's at 3% and maybe it makes sense to open a TFSA (Canadian equivalent of a Roth I think) and just buy simple index funds?
There is a probably a mathematically correct choice, but other factors may make this one very personal. Maybe you can do a little of both - especially with a low interest rate like that. If the TFSA is indeed like a Roth, you might want to contribute heavier to it now. You will not be in this low tax bracket forever. Start a tax-advantaged stache now while your tax rate is low and to get some money working for you earlier. It will probably be a lot easier to wipe out the debt when your income jumps.

michaelrecycles

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Re: Advice and budget critique for a newbie!
« Reply #4 on: June 17, 2013, 07:54:46 PM »
Hi everyone,

I am a single gal in my late 20s who is very un-educated about money, but trying to improve.  I have recently discovered MMM and I like the philosophy of "efficiency" and aligning money expenditure with personal goals and not blindly following the masses.  Although I like my job/career, I would like to eventually be financially free mostly so that I can make choices based on what I want to do rather than based on what I need to do for money.

Also, welcome!

Rebecca Stapler

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Re: Advice and budget critique for a newbie!
« Reply #5 on: June 17, 2013, 08:13:37 PM »
Great job saving money so far! Time to ramp it up a bit and you are going to be able to enjoy that $250k/year without any debt shackles.

I don't know where you're going for $8k/year, but I'm sure you can have some really fun vacations for $500, plus add in the cost of a flight home once a year -- and that's your travel budget.

I also agree about the computer. My last computer died and I got a great laptop for $700. I don't know what you're buying, but if it's good enough to be $1300, you shouldn't need to buy a new one each year.

I had fallen into the take-out rut when I was uninspired for dinner, and recently started freezing dinners ahead of time instead because pizza was doing bad things to my wallet and my waist. I'm going to guess that your greasy breakfast also doesn't make you feel very good afterwards? Can you buy some ingredients for an easy meal at home that is still a culinary splurge? Or make something in bulk ahead of time that you can pop in the toaster? Something like belgian waffles, then defrost some frozen strawberries for a topping? French toast? Pancakes? Individual quiches? Pioneer Woman's Overnight Baked French Toast? Mmmmmm... I've digressed ;) 

$100 a month on gifts is a lot. I know; I've been there too! It helps to come up with a $$ amount that you're comfortable with, and give that every time (I'm thinking in particular of the wedding gifts). Even better would be something really thoughtful that money can't buy -- a scrapbook of the wedding, with photos (if they released the digital images); include some special memories of the day in the card or special memories you have of the bride/groom. If the bride is anything like me, she will have that card long after the $50 is spent!

capital

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Re: Advice and budget critique for a newbie!
« Reply #6 on: June 17, 2013, 08:58:39 PM »
You are on one of the few remaining secure, high-paying career paths, with a high income almost guaranteed in a few years, so spending most of your income as consumption smoothing isn't necessarily nuts, even if you are planning on attaining financial indepenence in short order. You are only young once, and you've already invested a lot of your youth in your medical education. Since as you indicate you won't necessarily be able to do travel the same way for many years if you settle down with a family, I wouldn't blithely cut it out, but you might be able to save money by travelling to cheaper destinations (many parts of Asia and South America and Eastern Europe, as opposed to Western Europe and Japan), staying in hostels or the like, and travelling by unconventional means (bike touring, long-distance hiking, bus/train, etc.), while still having awesome experiences.

Once you finish residency, maintainining your current, still-luxurious standard of living would still enable you to save probably two thirds of your after-tax income; small tweaks like skipping cheap breakfasts while working hard would only really change things on the margin when facing that kind of torrent of cash. Conciously avoiding big cash sucks like big houses and fancy cars are probably the main things you need to do. Depending on where you live, you might also be able to cut down the rent expense in the long run, which is one of the few categories where you are a relatively big spender.

Unless the debt is causing you anxiety, 3% interest is low enough that you probably want to be putting excess income into investments, and interest-free loans definietly shouldn't be paid off.

Joet

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Re: Advice and budget critique for a newbie!
« Reply #7 on: June 17, 2013, 10:43:56 PM »
I don't understand why MD's stress a out their budgets in residency. The only thing I'd add is try to save the 5500/yr in a Roth yearly, Roth-space is precious. Everything else who cares, honestly. Try not to buy the dr house and the dr car and the dr lifestyle when you graduate and you'll be debt free, financially independent, and have a net worth of $2m or so by age 40 or thereabouts.


Cecil

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Re: Advice and budget critique for a newbie!
« Reply #8 on: June 17, 2013, 10:59:32 PM »
The only thing I'd add is try to save the 5500/yr in a Roth yearly, Roth-space is precious.

Unused TFSA space rolls over indefinitely. :)

Cecil

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Re: Advice and budget critique for a newbie!
« Reply #9 on: June 17, 2013, 11:09:00 PM »
Definitely open a TFSA with a discount brokerage (I use Questrade) and trade some index funds. Get used to how investing works and make your mistakes when the numbers are still small. I did this and lost about 10% in my first year, but thankfully it was only 10% of $5000. Better to learn from that than from losing 10% of $50k!

Nothing stands out wildly from your budget for someone about to make $250k, and frankly some amount of spending is going to be necessary just to keep yourself sane enough to finish residency. That said...

The travel budget is huge (much larger than my wife and I combined and we like to travel lots and well), but if that's what you love... Can you be more innovative about what kinds of trips you take? Rent an apartment for a month instead of living in hotels? Couchsurf? Camp across Europe?

$65/month on clothing? Every month? That's high.

Stop taking taxis.

Can you get a roommate?

meadow lark

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Re: Advice and budget critique for a newbie!
« Reply #10 on: June 17, 2013, 11:13:16 PM »
Well, if what you have now is what you want, great, continue on.  If you actually posted because you want some advice on reducing spending: Your rent is high.  You are paying for your parents when you are in debt up to your eyeballs.  You spend lots on travel.  Other than that your budget looks peachy.  You will be completely fine not changing your spending - but if you are actually worried about your budget, your food bill is not a problem.

pumpkinlantern

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Re: Advice and budget critique for a newbie!
« Reply #11 on: June 19, 2013, 05:36:10 PM »
Thanks for all the responses and advice!  I really do appreciate it.

I also agree about the computer. My last computer died and I got a great laptop for $700. I don't know what you're buying, but if it's good enough to be $1300, you shouldn't need to buy a new one each year.

Yeah, that was my spending for last year.  I'm not planning to buy another one for a while!

Since as you indicate you won't necessarily be able to do travel the same way for many years if you settle down with a family, I wouldn't blithely cut it out, but you might be able to save money by travelling to cheaper destinations (many parts of Asia and South America and Eastern Europe, as opposed to Western Europe and Japan), staying in hostels or the like, and travelling by unconventional means (bike touring, long-distance hiking, bus/train, etc.), while still having awesome experiences.

Thanks for the advice.  Yeah, maybe I can try to reduce the cost of each trip rather than trying to cut the number of trips.  I went through my costs from last year and I realized that it actually wasn't the two big trips, but the multiple small weekend trip out-of-town for weddings and bachelorette parties that really did me in.  I'll try to be more budget minded for those (maybe more car/train rides and less short-haul flights!)

I don't understand why MD's stress a out their budgets in residency.

Because we feel trapped, especially on days (and even the best of us have those days) when we hate our jobs.  And because we have so much debt and not enough income to do much about it...and all our friends in other fields seem to be getting married, buying houses, saving for retirement, etc.  Even though most of us don't want to quit, the feeling that you can't quit because you're in too much debt is the worst part - it's the loss of freedom, which to me is what MMM is all about.  Most of us were too young and naive and idealistic when we started this process to truly understand what we getting ourselves into.

Definitely open a TFSA with a discount brokerage (I use Questrade) and trade some index funds. Get used to how investing works and make your mistakes when the numbers are still small. I did this and lost about 10% in my first year, but thankfully it was only 10% of $5000. Better to learn from that than from losing 10% of $50k!

Great advice.  I like the point about learning with smaller numbers.  I'll open a TFSA this summer.

$65/month on clothing? Every month? That's high.  Stop taking taxis.
Yeah, I probably could cut back on the clothing budget.  The taxi's are really only very occasionally when it's late and unsafe to walk home alone.

TheFrugalShrink

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Re: Advice and budget critique for a newbie!
« Reply #12 on: June 19, 2013, 06:51:38 PM »
Are you at a hospital?  If so, is there a physician lounge somewhere in the building?  I'm a psychologist at a hospital and the MDs and psychologists have access to a physician lounge where they serve three (free!) hot meals each day plus there's fruit, sandwiches, snacks, drinks, etc.  Ours is tucked away near a tiny medical library, so it may be hidden if you do have one.  If not, I recommend making up some hearty meals and snacks to take to work or have at home.

I've worked among MDs for several years and the main issue seems to be, as Joet said previously, avoiding the lifestyle creep that so frequently comes along with those salaries.  There is not a single non-luxury car in the physician parking lot besides mine.  This has always been the case, even when I worked with NPs and PAs that made less than I did.  I know you don't have a car, but apply this to housing and any other items that you may be tempted to upgrade.  If you hang tight and live on your current budget for a decade post-residency, you will be so far ahead of your contemporaries!!

George_PA

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Re: Advice and budget critique for a newbie!
« Reply #13 on: June 19, 2013, 10:55:09 PM »
pumpkinlantern, I recommend attacking the 3% 55k loan first;  Do it agressive style;

your travel expenses are really high, $8000 a year comes out to $666 a month;  How about staying home and putting that $666 a month towards your student loans? You can use the $1300 that would have went to a buy a new computer to get you at least 2 trips home a year; $1300 a year is a lot for computers (who are you trying to make rich you or the apple shareholders); I spend $500 on a laptop every 4-5 years; tell your parents to get a part time job delivering pizzas in the evenings to pay for plane tickets if they want to visit you more than that;

also stop eating out and bring in a coffee to work; get ground coffee from a warehouse club cheap; for gifts, offer something hand made or some type of favor, i.e. offer to help them clean up one weekend; this will be free up another ($130 + $100 =) $230 towards student loan repayment; 

if you throw all this extra money every month towards your student loans, your interests costs will soon drop, i.e. you could probably soon get this cost down to $120 a month, this in turn frees up another $40 to throw at the student loan for aggressive repayment; Drop the internet and just use it at the library or at work if occasionally;  This will seem hard at first, but then hedonic adaption will kick in and you will soon get used it to like its nothing (its on the blog, please read about it);

So total here we have come up with an extra ($666 + $230 + $40 + $30 =) $966 that could go to pay them off; at this rate, in the first year, $966 * 12 = $11,592; If you throw in the extra 10k you saved before these cost cutting measures, you have about 21.5k paid off;  after the first year. the interest costs will probably drop to about $80 a month (due to all the extra payments you are making on the loan), thus giving you $1006 a month * 12 + 10,000k = 22,072 additional that you can pay off.  So in the fist 2 years, we have taken that 55k loan a mere 11k.  That third year, the loan will be gone quickly.  Then, this frees up more money to attack the other one.  Soon in about 5 to 5.5 years you could have all the debts gone before you even start making 250k; that would be a nice graduation gift to give yourself; 

also after a year or two, at this point, could then be able to find cheaper housing?  If you can free up some of this rent money, you could have the loans gone after 5 years instead of 5.5 years; this will give you more options once you are a doctor, i.e. you will not be forced to work for money to make payments on your loans like most new doctors have to; just think by doing simple things like using a computer at the library and bringing in your own coffee and not eating out, you start achieving dreams rather than be worrying about loans in your career; also we did not even discuss clothing yet so there's even more money to draw from there;

I recommend just getting rid of the debts first before investing.  This is what we did and I don't regret it at all.  I am not a doctor but I did pay off both mine and my wife's student loans before we invested or got a house.  We did this by living like we were still in college even though I was making a lot more money in my job.  You can make up for retirement once you start making 250k.  Paying off student loans is just as important as retirement because student loans cannot be discharged in bankruptcy.  You have them for life.  So its best to kill them ASAP while you are making a healthy salary.

I know someone will reply to this post saying that the student loan interest rate is only 3% while you could make 8% in stocks or in a retirement account, that my advice is bad.  First of all to such a person, congratulations, you get the economic noble prize for figuring out that 8 > 3; Please keep in mind, that there is a comfort and emotional aspect to this that is hard to explain unless you actually live it; In my opinion, paying off the student loan is an emotional and energetic lift that no amount of retirement money could ever make up for.  Its like being free again.  The MMM blog and mustachianism not about who can build the largest possible retirement account, instead it is about choices and about living life on your terms; thus, you get to live life the way you want if you follow this game plan outlined here; is it a question of whether you want to come out of residency debt free or not; debt free people can do things that people people with debt can't; its really that simple.
   
« Last Edit: June 20, 2013, 12:00:07 AM by George_PA »

tomsang

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Re: Advice and budget critique for a newbie!
« Reply #14 on: June 23, 2013, 08:51:04 AM »

The rent is non-negotiable at this point (complicated story) although I do live in a central location, so I do save a lot on transportation costs.  I live a cross-country flight away from my family so living at home is not possible.  Money for my parents is non-negotiable for me.  Interest on debt is something I can't change (although obviously, the more I pay down the more that will decrease).  School fees is not something that can be changed.

If I was an detective or played one on TV, these words would tell me that this is where the problem lies. Complicated and non negotiable sounds like where you should focus your attention. Also getting your parents self sufficient may be worth the effort vs. supporting them as their expenses inflate with their kid being a full fledged doctor. You are racking up debt, to support them. You are literally killing yourself to put yourself in a better place. What are your parents doing to help themselves?

Overall you are doing great. Which is easier to justify to family and friends that you are a broke resident. How you structure your image and mentality to fight off inflation creep when you start bringing in the bucks will be the differentiator.

Good luck!!