Financial planning for doctors


Chapter 2 - Expenses

Hopefully, working out your income was enjoyable. Now, here is an even more enjoyable part of your budget: working out how much you spend. (At least, financial advisers find this stuff fun). In some ways, calculating your expenditure is more difficult than calculating your income. Most people have relatively few sources of income, and they know exactly where that income comes from. However, most people have many forms of expenditure, and many people don’t keep track of how they spend their money.

Last year’s spending or next year’s spending?


In strictness, a budget is a forecast of future spending. However, our experience is that most people struggle to identify all of the things on which they will need to spend money in the coming year. Therefore, the first step in organizing a spending budget is to identify all the things that money is currently being spent on, or has been spent on over the last 12 months.

The concept is then quite simple: assume you will spend the same next year as you have this year. You only modify this if you know that the amount will be different. If, for example, you find that you have spent $100 a week on entertainment in the past 12 months, then use this figure to estimate your spending on entertainment in the next 12 months. On the other hand, if you know that your life insurance premium will be higher this year than it was last year, try to use the updated figure. If you expect something to rise but do not know by how much, add a logical amount, such as 5%.

Using this principle, the first step in developing a spending budget is therefore to work out what you have spent money on, and how much, over the last 12 months. The next sections tell you how.

Three ways to pay


Broadly speaking, people pay for things using one of three methods. Credit/debit cards are an increasingly popular way for people to pay for things. One of the benefits of using electronic payment is that your bank will give you a statement each month detailing everything you spend money on. From the point of view of gathering information for your budget, this is very useful.

A second way that people pay for things is by direct debit. Many people use direct debit to pay for regular expenses, such as loan repayments, school fees, rental payments etc. Once again, direct debit makes calculating your total expenditure relatively easy, because your bank statement will record all payments made in a particular period.

The third way that people pay for things is using cash. From the point of view of your budget, cash expenditures are the hardest to track. That is because you need to deliberately keep a record of how much cash you have spent. Our experience is that relatively few people do this.

Therefore, to complete a thorough budget, the first thing you may need to do is keep some records on your cash expenditure. Let’s look at a simple way to do this.

Cash records


You may be familiar with the concept of a ‘float.’ In simple terms, a float is the amount of cash that a business starts the day with. For example, your local milk bar might start the day with a cash float of $200. They then use their cash register to record all the cash that is put into the ’till’ and all the cash that is paid out as change for its customers. At the end of the day, the cash register record tells them how much cash should be in the till. They then manually add up how much cash they are physically holding and compare it to the register.


You can do a similar thing yourself. Your wallet or purse becomes your own personal cash register. At the start of the month, you record how much cash you are holding. You then write down each time cash is put into or taken out of your wallet. Here is an example of a record-keeping system (you can download a blank version of this table here):

[insert table]


We recommend that you continue this process for at least one month. At the end of the month, you can add up the total amount spent on each type of expenditure. Here is an example (you can download a blank version of this table here):

[insert table]

Now you know how much cash you have spent in a particular month, and what that cash has been spent on. You don’t need to repeat this process every month. You need only to decide whether or not your spending in the month for which you have records is representative of your spending in other months. Note in our example we used the month of February, February has 10% fewer days than longer months such as May. So, if you use February as your basis month, you need to decide whether your expenditure amounts need to be increased by 10% to be properly representative.

Once you are satisfied that the month that you have recorded is a ‘normal’ month, you can use the amounts as the basis for your overall expenditure budget. We will return to this below.

Electronic payments – direct debits and credit/debit cards

As we said above, electronic payments make budgeting easy. At the end of each month, your bank will typically give you a statement which shows everything that was paid from a particular account or accounts. Some banks still mail these out. Others let you ‘download’ them from their website.

When you combine these statements with your cash analysis from the previous section, you have a complete record of all your expenditure. You can then ‘transcribe’ the information from your statements into the table in the next section.

Online banking often allows you to extract statement information in a spreadsheet format, which can make sorting and adding up expenditures on similar items easy.

When using statements, remember that most large irregular payments (like insurances, which you typically pay once a year) tend to be paid using this method. Therefore, you will need to review 12 months’ worth of statements to ensure that you include all of the larger expense items. If you just use the statement for one month, then you will probably miss the bigger expenses.

Putting it all together – last year’s spending


You are now ready to put all your expenditure from the last 12 months into one list. This will take some time and you will need to use the information from your three sources (cash, credit/debt cards and direct debits). Here is an example of how this is done (you can download a blank version of this table here):

[insert table]


Moving between monthly and yearly


When doing a budget, you often need to ‘move between’ periods of one month and periods of one year. This is because no two months will ever be exactly the same – especially when it comes to expenses. Virtually everybody has some expenses that they only pay once or twice a year – things like insurances, registration fees, holidays, et cetera.


This is why the above table has a column for both monthly and annual expenses. Expenses that are actually paid monthly, such as groceries, can be shown in both columns. Expenses that are not paid evenly every month, such as medical consultations or car registration, need only to be shown in the annual column.

For obvious reasons, it is very important that any monthly expenses be translated into an annual cost.

Putting it all together – next year’s spending budget

Now it is time to think about the coming year. For each item that you spent money on in the past 12 months, you need to make a realistic estimate of how much you will spend in the coming year. You also need to add in any ‘new’ items that you expect to spend money on (for example, if you have taken out a home loan, you will now have loan repayments to make).

If you know what the expense will be, then use that precise figure. If you do not know exactly what the expense will be, then use last year’s as a basis and adjust if necessary. For example, the cost of private health insurance tends to rise by at least 5% per year. Adding 5% to last year’s costs would be a prudent move.

The basic rule with estimating spending is to err on the side of over-estimating what things will cost. This way, any surprises will be positive ones, where things turn out to be cheaper than you expected, rather than the other way around.

You can use the same table to estimate next year’s spending as you used to record the last year’s spending (you can download a blank version of this table here).