As a doctor anywhere in the world, your salary looks big until it’s the middle of the month. You realize that there are enough expenses to easily eat up the salary.
When you compare a doctor’s salary to most other employment professions, it might look huge but in reality, it barely goes anywhere through the month. It becomes extremely important to find ways to manage your finances to be able to strike a balance between enjoying your life and having enough for other purposes.
They don’t teach us financial management in medical school. I never once heard anyone mention anything about managing money as a doctor. We were all engrossed in learning about the human body, diseases, and treatments.
Sooner or later, every one of us realizes that a time will come when we will have to bear our responsibilities and those of our family. This is when learning to manage one’s finances/salary becomes something very important for you as a doctor.
Just like most salary-paying jobs, the money can easily disappear if not well managed. In this post, I will show you a simple technique to manage your income as a doctor practising anywhere in the world.
How to Manage Your Finances as a Doctor
There are many financial management strategies to manage your money as a doctor but I will show you the most recommended way to manage your funds. This applies to other professions and employed individuals as well, and it is known as the “50-30-20 rule“.
A little bit of financial planning will save you months of financial hardship as a doctor, and you will be well-equipped to champion any investment ideas you have in mind. The 50-30-20 is all-encompassing and will be able to help you achieve that as well.
The 50-30-20 rule emphasizes the importance of properly allocating your total income to cater to your immediate and future needs including savings. Leaving your salary unchecked without any way to share your money can make you spend it all on unimportant domains without realizing it.
What Is The 50-30-20 Rule?
As already mentioned, the 50-30-20 rule is not peculiar to doctors. It is a financial planning principle that is used by many investors, individuals, and organizations alike.
In this section, I will be showing you what the 50-30-20 rule is all about and how you can apply it to your finances as a doctor.
What then is the 50-30-20 rule, and how does it apply to doctors?
The 50-30-20 rule is a budgeting principle that suggests allocating your after-tax income (after necessary deductions and mandatory contributions) into three main categories: 50% for needs, 30% for wants, and 20% for savings, investments, and debt repayment.
The 50-30-20 Rule for Doctors
As a doctor, managing your salary using the 50-30-20 can help you maintain a balanced financial approach and keep you afloat all year round without going stranded due to financial mismanagement. Here is a practical way to apply this rule.
Determine your monthly after-tax income – that is the amount of money you are expected to receive in your bank account after taxes and other mandatory contributions have been deducted. You might also have some other mandatory contributions you want to consider.
Next, allocate 50% of your after-tax income to needs. Needs are essential expenses you cannot live without. They include basic things like rent/mortgage, utilities, groceries, insurance, transportation, and healthcare.
For example, if your after-tax income as a doctor is $1000 (assuming), 50% of this amount ($500) will be allocated to basic needs and expenditures as listed above.
Next, allocate 30% to wants. Wants encompass those non-essential expenses that give you a sense of enjoyment in your life but are not essential for survival. This means you can do without them. Examples include dining out, entertainment, hobbies, luxury expenses, etc.
Using that same after-tax income above, 30% of the money (which will be $300) will go to these expenses.
Lastly, 20% of your after-tax income will go to savings, investments, and debt repayment. This is where you service your emergency fund, retirement savings, saving for a car, and other outstanding debts you have incurred while still in school or yet unemployed.
The Implications of This Financial Strategy
The 50-30-20 rule is an effective financial strategy for managing your finances and income as a doctor. It puts your income into consideration to ensure that you do not spend beyond what you can afford.
Spending beyond one’s means is one of the most common reasons why most people go bankrupt despite receiving a good sum of money monthly. Even though the salary may not be all that you wanted, you can effectively utilize it using the 50-30-20 rule.
The 50-30-20 rule helps balance luxury with living. Spending all you have on luxury will only make you go broke faster into the month. You can save for a luxury expenditure by allocating it within the 20% proportion.
If you keep doing this every month, you might have leftovers from your needs allocation, which you can still roll over to another aspect like savings, or others.
In places where the salary is al-binitio insufficient, for example, in countries where you earn less than $300 as a doctor, it can be quite difficult to save for something using the meagre 20% allocated for savings. There are two things you can do about this.
One, you can budget your needs and wants to cut out unnecessary expenses. You can find cheaper alternatives to your needs and wants, and then channel the proceeds to your savings project.
You can also consider other ways to increase your net income through investments, side jobs, and other commitments. That way, your allocation for wants and savings will become sufficient to service them adequately.
Other Tips for Managing Your Money As A Doctor
Managing your salary money and other income you receive on a monthly also involves the following tips.
1. Adopt a monthly budget
The 50-30-20 rule does not imply that you must exhaust your allocated money. It only gives you an idea of the maximum allowable amount you can allocate to needs, wants, and savings/investments.
In other words, you don’t need to always exhaust the 50% of your income allocated for needs. A monthly budget helps you to plan your expenses (either needs or wants) to allow you to have some control over how much of your allocations you can spend.
While this helps avoid overspending or impulsive buying, it can help you reclaim some extra money from your income at the end of the month. Thus, increasing your money reserve for savings and investments.
2. Live within your means
As a doctor, living below your means will help you stay financially afloat all year round. Spending extravagantly will make you get stranded more often even when you have a salary increase.
While it is tempting to get a lifestyle upgrade when your income gradually, it is not compulsory. Avoiding lifestyle inflation will allow you to increase your savings and financial flexibility.
3. Invest in long-term
Long-term financial planning and investments give you something to work towards in the long term, thus keeping you occupied with a target. The 50-30-20 rule allows a portion for long-term investments, and when done, you can be able to diversify your portfolio and give you more financial security.
4. Regularly review your expenses
Reviewing your expenses can help you track sources where you can make better financial decisions to improve your financial score. Oftentimes, we all have times when we spend impulsively without knowing.
Reviewing your expenses allows you to identify areas where you can cut down on your spending to encourage more savings and investments.
5. Create multiple streams of income
Creating multiple streams of income is one thing you thing need to consider as a doctor. Rarely does anyone make substantial wealth from only one stream of income.
Having only one stream of income comes with an added financial risk. In times of union unrest or strike actions, you stand a chance of being cut off from your monthly salary, thus placing you under huge financial burdens.
Final words
Managing your money as a doctor is something you need to learn and keep developing. This is because that is, by far, the only way to achieve financial stability with the relatively inadequate income you might be receiving as a doctor in your part of the world.
