Welcome to The MapleMoney Show, the podcast that helps Canadians improve their personal finances to create lasting financial freedom. I’m your host, Tom Drake, the founder of MapleMoney, where I’ve been writing about all things related to personal finance since 2009.
Have you ever wondered what your life would look like on a doctor’s salary? It might seem surprising, but physicians and other high income earners face their own set of financial challenges.
My guest this week is Ryan Inman, host of the popular Financial Residency Podcast, a show dedicated to helping high income medical professionals stay on top of their finances. Ryan joins us to discuss the importance of setting a budget, regardless of your income level.
Unfortunately, many doctors struggle when they leave medical school. It’s not uncommon for a young resident to graduate with over six figures in student loan debt, and little clue how to manage it. Not only that, but as a doctor’s income grows, their expenses often increase at the same rate. Lifestyle inflation is a real temptation.
According to Ryan, this is why it’s so important for high income earners to set a budget, and pay themselves first. At any income level, budgeting gives you the freedom to say yes to things that are important to you, while having a savings mentality ensures that your net worth is always growing.
Did you know? One of the best ways to improve your credit score is by checking it on a regular basis. Our sponsor, Borrowell, makes it easy by offering a free credit report, along with regular, monthly updates. To get your free credit score and report, head to Borrowell today!
- Why high income earners need to budget
- The rationale behind saving 25% of your income
- Paying yourself first & why most people do the opposite
- Did you know? Paying down debt is improving your net worth
- Signs that you need to simplify your banking
- The relationship between budgeting and goal setting
- Longtime behaviours don’t change overnight
Have you ever wondered what your life would look like on a physician’s salary? After all, what kind of money trouble could a doctor run into? According to this week’s guest the answer might surprise you. Ryan Inman is the host of the popular Financial Residency podcast, a show dedicated to helping high-income earners stay on top of their finances. He joins us to discuss why it’s always important to have a budget regardless of your income.
Welcome to the Maple Money Show, the podcast that helps Canadians improve their personal finances to create lasting financial freedom. Did you know that one of the best ways to improve your credit score is by checking it on a regular basis? Our sponsor, Borrowell, makes it easy by providing a free credit report along with regular updates every month. To get your free credit score and report head over to maplemoney.com/borrowell. Now, let’s chat with Ryan…
Tom: Hi Ryan, welcome to the Maple Money Show.
Ryan: What’s up man? Thanks for having me on. I’m really excited to be here.
Tom: We’ve met a few times in San Diego where you live and we’ve sort of been talking about what you do with your podcast. Normally I don’t say this until the end but can you can just set it up and tell us what your podcast is?
Ryan: Yes. I run Financial Residency. It’s a podcast really geared for physicians. We are really trying to understand and tackle their financial challenges and just raise their financial acumen.
Tom: The reason I wanted to throw that in ahead is because it kind of led to our discussion which was how coming out of school and being at a higher income can affect budgeting. I’ve been a little lazy on the budgeting. I’ve mentioned this on the podcast before. I do more of just a monthly spending limit. I know I’m not overspending but I’m not breaking down different categories and everything like that. I just don’t spend more than I should.
Ryan: At one point did you budget to get to that number?
Tom: For sure. There was a point where I was getting out of debt and had less income to deal with at the time so I needed to watch those pennies. But what I wanted to go through today, especially for someone with a higher income, how does that work? Can they just throw the budget away or should they still be budgeting.?
Ryan: Well, I mean part of that is to go back to you and see what was working for you. Ultimately, there was a cost benefit where you decide whether or not it’s worth your time to go digging through and pinching the pennies. But you had to go through that experience in order to know what that monthly spending limit was. Just because you make a lot of money doesn’t mean you can just be an ostrich and throw your head in the sand and say, “Ah, I’ll figure it out later.” In order to make sure you’re setting yourself up for the right path to achieve whatever goals you want, you still have to go through and understand how much money is coming in and where it’s going out. The way I look at it is making sure it’s going out in a way that makes you happiest.
Tom: Yeah, and that’s a good point too. I should mention that while I don’t budget forward, I do track my spending in Mint. At least I have a clue that I have reached my spending limit and I can see how much I’m spending on things after the fact. So I guess I’m tracking but not necessarily budgeting.
Ryan: Well, budgeting is really like today looking backwards. Whereas, forecasting in a business, is today looking forward. And so what I try to do for clients is look backwards and figure out what they’ve been spending. Most people, unless they’re money nerds, don’t necessarily know where all the money is going. But ultimately, we’d like to get you where you’re at today looking forward and knowing what you expect to spend next month. YNAB is great software for that because it’s essentially forcing you to spend last month’s earnings and projecting out in the future what you expect to spend.
Tom: Why should someone start this budget then? What is the ultimate goal here? Obviously, people you’re dealing with are coming out with probably sizable student loans and everything like that. Is that sort of what they should be looking to tackle?
Ryan: I think it’s understanding where they’re at. Physicians are very specific in the U.S. at least. Our average clients have $283,000 of student debt. And we’re not talking consumer debt or car debt. We’re talking legit student loan debt. We have some with $600,000 or $700,00 in student debt. We have very few that have nothing but those are usually the foreign medical grads. But, looking at your student loans, obviously, that’s a big amount. And in the U.S. there are income driven repayments which allow them to pay a little bit while they’re going through training and when their income increases, they’re going to be paying a lot more. Most of them don’t know how that relates to their new salary. But in general, looking at budgeting, the reason why you do it is for freedom. To give you the ability to not only say, “Okay, I know what’s coming in and I know what needs to go out.” You also don’t have to have anxiety over whether or not you should really spend that. Or, if you go on a trip… “You know, I’d really like to do that family excursion but I just don’t know if we can afford it.”.
Tom: So it just keeps you on top of everything then?
Ryan: It keeps you grounded, really. I think it sets you free. I’ve done budgeting for a long time and like seeing all that. But dealing with hundreds of people’s budgets makes my budget go kind of to the back end. But being able to work through and say, “Okay, my credit card bills should be $5,000 and if it’s over that, I know that I’ve spent too much this month. But if it’s below it, then I’m good.” I maybe had a little bit excess but I was still saving all that money that I needed to, first. There’s fixed expenses, variable expenses and then there is your savings. I look it like paying yourself first. Because I deal with a lot of high-income physicians, they really have low assets. They’re actually income-statement rich and balance-sheet poor because both of them have negative net worth. I want them to save, first. So, if they’re going to make $10,000 in a month, the goal would be to save 25 percent of that take-home pay, first. So $2,500 goes out and it almost doesn’t matter how you’re spending the other 75 percent.
Tom: It’s better than spending 100 percent and then trying to find out where the savings is.
Ryan: Most people start spending and then at the end of the month wonder how much they have left. You’re going to just grow into that income as your income rises. It’ll go up with inflation and raises and all sorts of things. You’re just going to keep spending. Trust me, the money will go somewhere. People like you and I have more traditional jobs in the sense where we don’t earn what physicians do where they make $50,000 and then all of a sudden $300,000. We don’t have that rapid increase. Corporate people in corporate jobs maybe make $50,000 then you’re making $55,000. Then maybe $60,000. Our lifestyle inflation is very slow because our income grows but it grows much slower. And in the physician space, their income quadruples overnight because they’ve finished their training and their expenses quadruple over night. That ends up being the biggest issue.
Tom: Yeah. Once they get that increase they get the new house and the new car?
Ryan: Yes, the delayed gratification. And trust me, I get it. I’m married to a physician. I can make every excuse in the book and it would probably be justified. But yeah, delayed gratification. I’ve been driving this old car. I want the new car. I want the doctor house because everyone else has these. And all of a sudden it’s expenses. And Amazon goes through the roof. We literally have a category (when we track for clients) for Amazon because it’s insane. Amazon is taking over the world.
Tom: It’s a good thing you bring up delayed gratification because I never thought of that. You’re going so many years in school with next to nothing and then all of a sudden you’ve got this decent six-figure income.
Ryan: Yes. The normal route for those of us that aren’t physicians go through high school and college for four years and maybe even grad school for a couple of years. You’ve still delayed gratification. You’re still earning your way. You’re probably taking out a ton of debt and not spending that much. And then you get that nice job where you’re making $50,000 or $60,000 or $80,000 and you’re excited to be able to actually go out to dinner with friends and not have to sweat about doing that and still pay the rent. Most people don’t stop and say, “Okay, let’s actually find out how much should I save first?” When you’re discussing budgeting just in general, it doesn’t matter if you make $50,000 or $500,000, what are your goals? What’s the original goal of it? Where do you want to go in life? How are you going to spend this money now and into the future? If you can start with the high-level approach to your finances and what trajectory you want to go, then you can load it up into Mint or YNAB and just track it for a couple months. But don’t make any changes. Just review and try to understand where things are going. Then you can sit back and say, “Okay. I’m spending way too much in dining. Let me scale it back 20 percent.” Or, “I pay too much for cable. Could I get Netflix and cut it by $30?” Then you can make changes. But if you don’t know where things are going first, it’s really hard to be able to make any change.
Tom: I like how you point out that there’s an opportunity to still spend. I think a lot of people look at budgets and think it means they can’t spend anymore. But you’re seeing it more as people budget so that they can spend. They just get the “must-do’s” out of the way first and then see what they have left.
Ryan: It’s almost the excuse to spend. Essentially, the budgets giving you the ability to say “yes” to some things and “no” to other things. One of the things when you’re determining your goals is, you should sit down and really think, “Hey, if I’m spending money in these 10 places (through Stitch Fix or whatever other subscriptions you have) are those really bringing me joy?” Some people think, “Yes, absolutely.” And some just did it because it looked fun or they forgot to cancel the subscription. I would want you to then rank your priority list; this stuff’s really fun, really good. I want to do those and more of it. Then, as you start to go down the list eventually things kind of start trailing off and it becomes really easy to say “no” to those things. You realize if you stop some things you can do more of other things. And that’s awesome.
Tom: Let’s say someone wants to start budgeting. How do you normally lay it out? What’s the budget look like to you?
Ryan: There are 11 things we track. I’ll bring up the list here so we can kind of go through them. But for clients, there’s 11 high categories that we track; auto and transport, bills and utilities, debt, food, health, home, insurance, family, lifestyle spending, Amazon and travel.
Tom: Amazon is literally one of the main categories?
Ryan: It literally has its own category. Because I work with all physicians, we look at everyone holistically. Based on a percentage of their net worth, how much does every physician family spend at Amazon every month? Some people are at six percent while others are at one percent. Then you can see what your spending is compared to your peers. But yeah, Amazon’s taking over the world.
Tom: Amazon being a separate line, is this just because of the lack of tracking there? It just shows up in their expenses as an Amazon line, right?
Ryan: Yeah. So Amazon, it’s tough. And there’s a way to break it out but, ironically enough, it’s not actually on Amazon. You have to go into Google and type in, Amazon CSV export and it’ll take you to a hidden page on Amazon.com. And that’ll give you the ability to download all of your orders. Then you could technically categorize it if you want. Most of the time our clients don’t really love sitting inside their budgeting software that much so we basically created the main category for it. If you think this stuff is cool and want to nerd out on this stuff, have at it. Then create a separate line item for a transaction to sort of break it out. But, in reality, you probably don’t need to go that in-depth on it unless you truly want to see what you’re spending.
Tom: I had a similar problem I’ve mentioned on the show a few times where I spend a lot of my money at Costco. And when I’m looking at the tracking it’s hard look at it reasonably because you can’t tell if it’s food, clothing for the kids or is it just some stupid thing we bought that week. So yeah, it would be nice to see it separately. I totally get it. We’re not as big on the Amazon yet but Costco is definitely a void in our tracking.
Ryan: In your tracking, if you waited to the next week or even the next month you’re totally screwed. You’re never going to remember what it was. But what if you left and packed up the car. Your wife drives home and on the drive home you flick over to the back of the receipt and gave ballpark figures to the money spent; $60 for the kid’s clothing, $120 was for food and the rest was lifestyle spending. You could literally go and plug that in if you really wanted to, if you were really tracking it but just don’t let it delay a month before you come back and it. Otherwise, you’re toast.
Tom: Yeah, or you’ve lost the receipt.
Ryan: You might as well throw it all onto lifestyle spending and call it a day.
Tom: Similar to your Amazon line, I’d keep it as a Costco line. But I much prefer the idea of breaking it out to actually be able to see those different items.
Ryan: It’s just a little more work. Even if this is your first time doing it, for the first three months I’d say, absolutely. I don’t care if you make a million dollars a year, absolutely break everything out. You just see where it’s all going. When you do that review you’re going to say, “Wow, I had no idea I was spending $2,000 a month at Costco!” That will cause you some pause. You think, “Oh, should I do that? Is it making me happy? Or would I rather sacrifice $500 a month at Costco and allocate that to travel so we can travel more and have that travel budget?”
Tom: Costco or Amazon can kind of be a bit of a crutch for people because if you add some of it as food on one line you can pretend it’s all just good on that line when it’s really not.
Ryan: You’re just lying to yourself at that point. One thing most people don’t think about when they’re budgeting or doing casual planning is your banking structure and how much that actually influences your spending and how it helps you automate savings. What I mean by that is… Let’s use your example of spending too much at Costco. What if you said to your wife, “Hey honey, let’s cut back $500 at Costco and make that travel.” If you don’t have a separate savings account that’s literally earmarked “travel” go a step further and title it something like “Family Vacation to San Diego” or something like that. I’d literally title that in your bank. I’d also set up that automatic transfer for that $500 going into that separate travel account too. So organize your banking structure by big goals and big things you want to save for. Another one is annual expenses. It’s pretty much a syncing fund. You know you’re going to pay your auto insurance every six months. Let’s say it’s $600 bill. Every month you should be allocating $100 to that. In our budgeting software, even if you put six months at semi-annual, it’s going to monthly breakdown $100. But we don’t think that way because our banks aren’t really organized that way. But, if you hadn’t said, “Okay, look. Based on all my semi-annual, quarterly, and annual expenses, I need to move $600,” you should be moving $600 automatically from your checking to a separate savings account. That’s the stuff that will really hope you stick to that budget.
Tom: That’s a great idea. Here in Canada we have quite a few online, high-interest banks that are free. There is nothing to stop you from opening multiple accounts and still having the same login so it’s easy to move money between those accounts.
Ryan: There’s no excuse now with online banking. I’m not saying to go and get all buddy-buddy with Wells Fargo and open up 14 accounts. Stick with the online ones, the great ones you know have high-yield savings and organize them in a way you can automate and make this stuff simplistic. One of the things we see all the time is where people have four or five different banks. It’s ridiculous. One bank can do everything you need. Now, if you maybe had a mortgage that a bank required you to be there, fine. I can understand that. Maybe even a car loan through them if you had to. But in reality, make your banking simple and automate as much as you can. Then sticking to your budget will be so much simpler.
Tom: I like the point about keeping it simple because aside from me, I think a lot of people that read the blog start chasing a slightly better interest rate at different banks. I prefer to shop around like that but when it comes to something like needing three savings accounts all of a sudden, I’d just certainly put them under one account and make that an easy access.
Ryan: Sometimes we see where people have an emergency fund but it’s also their travel fund. And it’s also their car or their house down payment. How do you know what’s what? How are you keeping track of it? Now, YNAB is a software that allows you to keep track of it all in one account because the software itself pretends that you have multiple accounts. Something like that is awesome if it helps you. But if you’re not using YNAB, pretty much every other software doesn’t have that allocation. You would physically have to have that at your bank. But don’t let it just all sit in one account because even if you needed all that money for an emergency or whatever, you’re not earmarking all of that there. Some of that’s your travels. Some of that is your house. Some of that is your car… Whatever it may be.
Tom: It sounds kind of risky to have travel and emergency savings in there.
Ryan: It happens all the time. I would say more than 50 percent of the time I see that.
Tom: Does the emergency fund kind of get depleted during vacations then?
Ryan: It depends on the people. Sometimes their emergency fund is literally just the travel budget disguised as the emergency fund. They may have had $10,000 in there but it’s all gone because they went on three vacations. Then they wonder where the emergency part of the fund went. The way I see it, if it says emergency, do not touch it. And truly only touch that if your car died or a tree fell through part of your house and you’ve got a whole bunch of repairs to do. Maybe you lost your job. That’s the emergency stuff. It’s not, “Oh, we went to Cabo and wanted to stay an extra couple days.”
Tom: That’s definitely not an emergency.
Ryan: It’s way more fun of an emergency though.
Tom: Fair enough. You mentioned that you suggest saving 25 percent. What is that for? Is there a certain portion that you would normally mark out for retirement? Or is this also for other goals as well?
Ryan: When you think of other goals like travel, it’s really just deferred spending. If I was to go to Canada today, that would hit my variable expenses under travel. But, if I was saving every month and then going to Canada at the end of the year, it’s still a variable expense. So that 25 percent—I say 25 percent because physicians get a late start in life and they usually have a bunch of debt they have to take care of. Most people who are earning a decent income (around six-figures) who don’t have all that debt and who have been saving since they were 22 or 23 years old, maybe 20 percent is right for them. I don’t know of your listenership and where they’re at. And, obviously, there’s a bunch of disclaimers saying this is general advice, but we typically say 25 percent. Out of that 25 percent it’s anything that will increase your net worth. That could be investing, saving in IRAs or paying down debt. That helps your net worth. Your net worth goes up when your liability (which is that debt) gets paid off and goes down. Anything that is generally making a positive impact on your financial life is where we’d want that savings to go.
Tom: Okay, so 25 percent could be potentially debt payment all upfront if that’s their style. Here in Canada it would be the RRSP if you’re saving up for retirement. Then we also have the TFSA which is a handy account where you can put money in and pull it out but it still grows tax-free and you get your contribution room back. So yeah, I like that. It’s not that it’s 25 percent just to save. It could also be paying off debt as well.
Ryan: We have several people that come out with enough consumer debt, auto debt and student debt, they’re pretty much at 100 percent of that 25 percent. But, if they can get there, it will go to debt pay-down. Most of the time they’re the ones that can’t get to the full 25 percent so we may start with five or 10 percent. But that five or 10 percent is going to whatever debt needs to be paid down first. Then we’re going to snowball it into the next debt and the next debt until all the debt is gone. That’s when we’ll start looking at investing depending on interest rates and stuff like that.
Tom: I’d say paying off debt makes more sense here. Granted, if it’s a student loan you can probably do better investing. Our percentages are low for student loan interest. In general, I would prefer that most people probably pay off the debt and wait to invest after.
Ryan: Most people don’t think about it. Let’s say you had an interest rate of five percent on your debt. It’s not like you have to go five percent at the market to do that. If you’re putting it in a tax-deferred account, that’s different. If you’re just going to go open up a Betterment account or something else and you’re going to put money in there, you actually would have to earn more than the five percent for it to basically make up for that guaranteed five percent you’d be paying down the debt. So that’s why we say it depends on the interest rate. But more often than not, you want to pay down the debt first.
Tom: I love that because it’s totally the guaranteed savings. You know you’re paying that, especially if it’s high credit card interest.
Ryan: Yes. There’s nothing that is going to make that kind of return that is legal other than the credit card. If your work gives you a match or something, that’s different. Other than that, crush the credit card debt, the consumer debt, the personal loans—all of that stuff.
Tom: Is there anything else people need to know, especially if they’re high-income and looking to actually start a budget? Are there any other steps they should know about?
Ryan: We talked a bit about the goals but it sounds so different than what you would normally think, ” I want to set up a budget but that deals with numbers.” Yes, but if you don’t know the direction you’re going, the numbers don’t mean anything. I kind of use a really bad sports analogy but look—if we’re going to go play golf and we get up on the tee-box and it’s night-time and we have no idea where the green is and you just whack away, are you going in the right direction? Maybe. Maybe not. But if we stop and think, “Okay. Before I swing and hit this golf ball to hopefully go towards the goal, where is the goal and what is it?” Let’s say in listening to these two guys you decide to start a budget because it sounds legit—good! Where do you want to go? How do you want to spend? How long do you want to be working for? What are some of the challenges and opportunities coming up? How is that going to influence how you’re spending? Once you figure that out, then start the piece of connecting the banks to YNAB or Mint. And just hang out for a month or two. Don’t go crazy. This isn’t some fad diet where you’re going to eat kale, drink water and you’re done. You’ll quit in a week. So if you come in and load up everything and decide to cut this, do that… you’re toast. You’re not going to make it. This is the long game. You’re not just some fad diet and done. You’re trying to change long-term behavior and sometimes that takes a long time to do.
Tom: Well, it’s been great. I hope we’ve enticed people to get their money under control and start budgeting. Can you let people know where they can find you online?
Ryan: I’m at financialresidency.com. It’s a podcast. It’s a blog. Hopefully, it’s been beneficial like today’s show. If you have any questions you can always find me there.
Tom: Great. Thanks for being on the show.
Ryan: I appreciate it.
Thanks Ryan, for your tips on budgeting at any income and for your advice about keeping banking simple. You can find the show notes for this episode at maplemoney.com/ryaninman. I want to thank you for supporting the Maple Money Show. In July we had our best month yet. I’d love for you to help us continue to grow. If you have the Apple podcast app on your phone, can you pull up Maple Money Show and give it a quick rating? Even better, leave a review and let everyone know what you think of the show. Don’t forget to tune in next week as Dustin Heiner and I discuss whether or not owning a rental property can be considered passive income.