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Thanks to the internet, it's now even easier to manage one's finances. But even these online tools require inputs based on highly individualized budgeting decisions. Here are five key questions you must answer to create a budget that truly works for you. By Michael Norton, MD, MBA

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Quick show of hands: who feels like things cost more today than they used to? Significantly more? I sure do. When I finished high school in 1998, I could buy a bottle of diet Pepsi from the cafeteria vending machine for $1. That same 20 oz bottle would cost me $2.09 at the grocery store today – $2.24 after sales tax! And it’s not just soft drink prices that have increased over the years. The average annual inflation rate since I graduated was 2.55%, meaning that it takes $1.83 to get as much in 2022 as $1 would buy you back then. Inflation rates in the last year have been especially high: over the twelve months ending this past October, the US saw a 7.75% increase in prices across the board!

A misconception common among Americans – one that’s been voiced to me several times – is that physicians don’t feel the effects of inflation and can afford whatever we want, whenever we want. But as The Office’s own Dwight Schrute would say, “False. Even those with six figure salaries can spend their way into bankruptcy.” It’s imperative that we make a budget and stick to it.

Nowadays, budgeting has become easier than ever. The internet is home to countless budgeting templates, many of which are available for free or close to it. These templates can be customized, with categories being added and removed to tailor them to their users’ specific lifestyles. Similarly, a wide variety of apps allow you to track your expenses in preset or personalized categories, which can then be compared month by month to analyze spending patterns and determine better ways to allocate money. Many such apps can be linked to your bank and credit card accounts, downloading and categorizing transactions automatically.

Even the most sophisticated templates and apps require you to make personal budgeting decisions, though, and it can be hard to know where to start. But don’t be intimidated! By asking yourself five basic questions, you can create a financial plan that’s just right for you.

Question 1: How much do I really make?

The amount of money you earn is not the amount available for you to spend. Between taxes, retirement contributions, and health insurance, much of your nominal pay disappears before you even see a penny. If you make financial decisions based on your gross salary rather than your net income, you’ll find yourself in a deep financial hole that can be incredibly difficult to escape. Determining the amount of money you actually bring home is an imperative first step to creating a sensible budget.

Question 2: Where is my money going?

Categorizing and tracking your expenses might take some time and energy, but it’s worth it. Start by making a list of your fixed costs – the things that don’t see large changes from month to month, like housing and transportation costs, utility bills, and those dreaded student loan payments. Many utility providers have programs that smooth your bill so you pay the same amount each month, settling any under- or overpayment in December. (Something similar that I’ve done for years is to add the cost of large, predictable expenses such as car insurance, annual subscriptions, birthday and Christmas budgets, etc., and then divide that into monthly contributions to a separate savings account.)

Next, take a look at your variable expenses. This includes things like food, gas, entertainment, and other miscellaneous items, and it generally represents the easiest ways for you to trim down your expenditures.

Question 3: What are my financial goals?

Ever heard of SMART goals? That’s an acronym for Specific, Measurable, Achievable, Realistic, and Time-bound, and it provides an excellent framework of setting financial goals. You should set both short- and long-term goals. Short-term goals can generally be attained in one to three years and may include things like building an emergency fund (usually equal to 3-6 months of your salary), paying off a car, and eliminating credit card debt. Long-term goals can take extended periods to achieve, sometimes requiring decades. Examples include creating a college fund for children, putting away for retirement, and paying off a home.

Progress toward goals should be tracked the same way expenses are, and goals should be evaluated and adjusted frequently so they remain relevant to your wants and needs.

Question 4: What’s my plan?

If the previous question dealt with your overarching financial strategy, this one deals with your tactical approach to getting there. Take a look at your variable and fixed expenses, then compare them to your net income and financial goals. Make a plan for how to spend or save your money to get from where you are now to where you want to be.

Many people find it helpful to classify expenses as either “needs” or “wants”. Housing expenses? Need. Netflix subscription? Want. Transportation? Need. Subscription to the magazine that sits on your coffee table and never gets read? Want. You get the idea. And while you don’t want to give up the things you want, it sure beats having to give up the things you need. So if the time comes for you to tighten your belt, that will help you know where to start.

Another way to allocate money is with the 50/30/20 rule. Using this budgeting technique, you divide your net income into three broad categories by percentage. 50% of your money is earmarked for needs, 30% for wants, and 20% for savings and/or debt repayment. Obviously, this technique is not suitable for everyone and may require some tweaking to personalize to your life. But it’s a good place to start.

Question 5: Am I sticking to my budget?

With your budget made, you’re prepared to make financial adjustments to keep your spending in check and achieve your financial goals. Usually, the easiest way to cut costs is to trim down your “wants.” Cut down on things that are nice but unnecessary as a first step. After that, take a look at your “needs.” Can you get quality groceries for a better price than the store you’ve been using? Can you cut down on gas by waiting a little while and grouping several errands together? Often, when the belt gets tight enough, it turns out that some of our “needs” were really just strong “wants” that we didn’t want to say goodbye to.

There are ways to cut down some of your fixed expenses, too. With some shopping around, you may be able to find better rates on car or homeowner’s/renter’s insurance. You may be able to refinance some of your loans to lower interest rates. These things can potentially have huge impacts on your ability to save toward your short- and long-term financial goals.

Finally, keep in mind that budget isn’t a mandate from on high, it’s a financial tool to help ensure that your income is sufficient to cover your expenses. And both of those things – your income and your expenses – will change with time. Raises, job changes, major life events, and the attainment or abandonment of specific goals are some of the factors that can affect whether the budget you previously made is continuing to meet your needs. So get into the habit of reexamining your budget regularly and making whatever adjustments are necessary to keep it just right for you.

Michael Norton, MD, MBA, is clinical assistant professor in the Department of Anesthesiology at Wake Forest School of Medicine.

The ASA Committee on Young Physicians is pleased to present this monthly article series on personal finance. These articles are not written by hedge fund managers or real estate tycoons but by practicing physicians. Some have business degrees and some do not – but every contributor is an anesthesiologist who has some guidance to offer the rising generation of attending physicians. It is not the intention of the committee to offer definitive financial advice, but rather some pearls of wisdom to consider while developing a personal fiscal plan.