4 Questions for Every Budget, Part I

A typical career arc for a dentist starts out slowly in terms of building income but picks up steam in the second decade, typically peaking in the third. During the first part of your career, when you’re likely paying down some debt and perhaps making big purchases such as a car or home, you innately understand the need for a sound budget. But if you’re like many, as your earnings increase, your desire to make and stick to a budget can begin to wane.

This is a mistake, because the budget is the key building block for not just your current financial picture, but your future one as well. Over three parts, let’s take a look at 4 key questions that should inform any budget.

1. How much should I set aside for my future self?

This is a highly personal question with an almost endless number of variables, but since that answer isn’t very helpful, let’s instead look at some of the factors you should consider:

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Age.

As we noted above, younger investors tend to have less to put toward future goals, so the older you get and the more you earn, the more you’ll want to start putting into investments.

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Disposable income.

I’ve always thought of this as a strange term, because “disposable” connotes something you’re throwing away, and investing is typically the opposite of throwing money away. But what is meant by disposable income is simply what’s left over after your monthly expenses have been subtracted from your monthly income. This can also be called “discretionary” income, and that term makes more sense, as your discretion should tell you to sock much of it away!

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Liquidity needs.

Discretionary income may be an easy number of figure out, but on its own it isn’t very informative regarding what types of investments you should consider. That’s because your need to access your money will vary heavily depending on your individual circumstances. For instance, if you have five young adult daughters, or three college-bound youngsters, you may need access to your money more than a dentist who doesn’t have children. Needing liquid funds means you’ll have less to put away for future needs.

All of these considerations will factor into your budget, so make sure you have assessed both your current financial situation and your future goals.

2. How do I balance investing with paying down debt?

The answer to this question will depend largely on not only how much debt you have, but what kind of debt you have. Not all debts are owed equally! Student loan debt, while an albatross to many a young dentist, is generally not bad debt, because it typically has a very low rate of interest. Credit card debt, on the other hand, often carries a very high rate of interest—sometimes shockingly high.

When building your budget, allocate more money to high-interest debt. In fact, allocate a lot more money to high-interest debt, and pay the minimums on your low-interest debt until it’s paid off.

But even while paying off debt, it can’t hurt to at least pay yourself a little something, even if the amount seems tragically small. Why? Because of investor inertia [add link to last week’s investor inertia article]. Getting into “investment motion” will make it much more likely that you’ll stay in motion.

In Part 2, we’ll look at how to tackle a mortgage and the bane of many budgets: how to deal with miscellaneous expenses. In Part 3, we’ll look at how you can stay on track once you’ve established your budget.