In 2007 we were able to make dramatic cuts due to the cost savings of combining two households and other various one time savings.

In 2008 the “one time expenses” have gone the other way and hindered our progress vs last year. The result was an extra $1,294.90 being spent in the first quarter.

That being said, here are where our dollars went for the 1st Quarter of 2008:

1. My Landlord took 18% : Our rent would cover the mortgage of a very reasonable house in most parts of the country. Renting is one of the prices we have to pay to complete my training. Although we would prefer to be building equity, we are trading that equity for the flexibility that renting provides to a busy Resident. The last thing I want to do post call is to fix broken stuff.

2. Our Doctors took 14% : I find it interesting getting bills from physicians and hospitals know that one day I will be sending out the same bills. After seeing what is being charged for medical services I find it very believable that medical bills are the most common cause of personal bankruptcy. The caveat here is that I rather be bankrupt and alive than rich and dead.

3. Our Grocery(and Farmers Market) received 14% : This is a marked improvement for our family. Since we have gotten married my wife has done a great job of slowly helping us eliminate waste from our food budget.

We came from two different families which had two very different approaches to food. This was easily identified by looking in the refrigerator. My family always had a full fridge but at times had to throw out a lot of extra/old food. Her family had a relatively empty fridge. With her running the budget our refrigerator is looking a lot like the one she grew up with. We are less wasteful, saving money and healthier for it.

4. The Insurance Industry got 8% : As a very risk adverse individual, one of the first things I did after finding out my wife was pregnant was to update all of our insurance policies. I went through our Renters, Life, Disability and Auto insurance policies to make sure that we were carrying the appropriate coverage for the life changes ahead.

The end result is that I can sleep soundly at night know that my family will be on a stable financial footing should anything happen to me or my wife. The one form of insurance which is contributing to the majority of our insurance costs is my disability insurance policy. Given my ongoing training, this was a very important decision for us which I covered in this post last fall.

5. We gave the struggling airlines 5% : With a new baby and our family currently living 3000+ miles from our hometowns let it suffice to say that we have had to make a couple of transcontinental flights so far this year.

As difficult as air travel can be, the cost to cover this distance is very reasonable compared to the time and fuel it would take to drive. It has also caused us to give some serious thought on where we would like to end up settling once I am finished with my training.

In summary it looks like we will be close to our goal of spending <$50,000 for 2008. We still have some significant expenses for the year: a move cross country, some auto work and perhaps some more medical bills.

It will be close, but we will have to do better than we did in 2007 because we will not have the luxury of having two full time incomes to pick up the slack.

I have found that an often overlooked key to success is the development of a system that works for you.

How do you keep your money in your wallet and bank accounts?

Everyone starts differently, my system slowly developed from this: a blank index card.

I still use my index card system today to keep a list of all my credit card accounts, how much I owe and when my next payment is due.

When developing your system, the main idea is: simplicity is your friend!

You don’t need an overdeveloped computer program or an online database. If you start with a complex program that takes and hour or more just to download and set everything up you will have to overcome quite a bit of inertia to keep it going.

Just a simple list of all your accounts will enable you to answer the major financial decisions we have to make:
- how much money do I have?
- who do I owe money to?
- what is it costing me to borrow this money?
- who do I have to pay and when?

Once you have been doing this for a few months it becomes second nature and you no longer have to think about it.

The month is still young, it isn’t too late to begin a new habit in 2008 that will improve your finances.

I was quite disappointed to find that we were $20,000 over what I had guessed our yearly expenses would be in 2007.

I had forecasted our expenses to be about $40,000 in 2007. I arrived at this number as a random starting point based off the calculation that this is what we could spend with a pre-tax income of approximately $53,000($40,000*1.3265).

$51,000 was my expected salary for 2007. I had hoped that once we were married that we would have been able to live solely off my salary and be able to save my wife’s entire salary, unfortunately we weren’t even close most of the time.

Our biggest surprise was that our biggest expense was our education. A focal point of this blog that I will develop as time goes on is that although pursuing higher education is a very expensive proposition, if you chose the right career this money should be seen as an investment and not as an expense.

That being said, I am counting the money we pay on our student loans as an expense that we incurred years ago, similar to a mortgage.

This year our student loans made up 23.75% of our spending for a total around $15,600. The vast majority of this money went to pay off my sole private loan that I had taken out during the interview process for residency.

With my private loan paid off, we will continue to make our minimal monthly payments on 2 of our remaining loans and I will keep my largest loan in forbearance for at least 6 more months.

We are lucky that housing only makes up about 15% of our spending. Although our rent is as much as a mortgage for most individuals, we are doing our best to minimize the expense by living in a studio apartment in a walkable part of town. Because we rent in a large city where I am finishing my training, this is a pretty fixed cost for us until July.

Ever since I have had to buy my own groceries I have been amazed at how much money I spend on food. This year groceries were our 3rd highest expense and made up 10% of our expenses. This doesn’t sound excessive but when 10% is equal to $130/week, this is a high priority item for our family.

My explanation for our grocery bill is that as a physician, I see on a daily basis what a bad diet and lack of exercise can do to a person, therefore my wife and I are very particular about what we eat. We eat very little processed foods and strive for as “natural” of a diet as possible. We try to buy all of our fruits and vegetables at a local farmer’s market and do eat a fair amount of fresh fish or meat. This diet of nutrient dense foods is much more expensive than the usual low nutrient/high calorie food all around us. That being said, we will find a way to bring this down for next year.

Vacation and Travel was another surprise as our 4th largest expense of 2007, comprising a little over 7% of our expenses. Between flying back home and attending a conference or two we have spent more of our income on airfare and hotels than clothing, utilities, transportation or any other normal “household” expense. I know that this is mostly due to the fact that I have not done the best job of managing our miles programs maximizing our free flights.

This is a category where we could really save some money in a few years at the end of my residency by moving closer to our relatives when we settle down.

The rest of our expenses are all small contributors(about 5% or less) to our yearly total. This is good news in the sense that our expenses are balanced but bad news for 2008 when I am looking for areas of our budget where I could save us money.

As I have progressed in my education, each step has required a progressively more expensive examination to reach the next level. I just found out the latest step in this journey is going to cost me close to $1000.

Luckily over the past year my wife and I have managed to accumulate a sufficient emergency fund to help us to cover unexpected large bills like these.

Although in most instances I wouldn’t qualify a test as a “true” emergency, this bill happened to come shortly after I had paid off the last of my old credit card debt, reminding me of my old habit of living beyond my means.

Couple that timing with some comments from a few of my classmates who live paycheck to paycheck and I am thankful that I no longer have to place the unexpected expenses that come up each month on my credit cards to be paid off some time in the future.

Everyone is different in how long it takes them to accumulate an emergency fund. I found that for us, it was very helpful to have a lump of seed money after selling my truck to help this account have some heft to it as soon as I opened it. Perhaps this could be a good use for a holiday bonus this year.

To keep this simple I broke down our goals into:

Savings: We have managed to build our emergency fund to cover about 4 months of living expenses. We will continue to save the majority of our excess earnings here as the beginnings of a down payment for a house. We are still over 2 years away from looking to buy a home so we do have time in our favor.

Investments: Back in January I was toying with the idea of still being able to max out our Roth IRA’s lump sum for 2006. When our taxes were done, we actually ended up saving $1000 off our tax bill by contributing to a Traditional IRA instead. This will not effect us too much in the long run since I should be able to convert this into a Roth IRA in 2010. For our current year I have been contributing $200 a month to my Roth for 2007 with the intention of making up the difference at the end of the year. My wife is contributing a minimum amount to retirement at this time which remains a point of discussion.

Debt: Debt has been a central part of my life for the past 7 years and will continue to be for the rest of my life. The key difference between the Dr. T of 3 years ago and Dr. T today is that I am using debt more wisely now and I am more educated on the pitfalls of not managing debt. My goal for our debt management in 2007 is to rid myself of the last of my credit card debt from years past and to continue making my student loan payments. At this time, we have been able to do this and will pay off the last of my old credit card debt in November. My private loan comes due in November as well which will add to our monthly payments

Expenses: When I looked at our expenses from 2006 as 2 separate individuals I was quite embarrassed with our sum total of about $98,000. This number included multiple “one-time” expenses so it was not an accurate representation of our day to day lives. I figured we should be able to cut that to about $40,000 for 2007 and judging by our results so far we are pretty close.

Here is the break down of our expenses so far this year.

As you can see we are about $4000 off our goal at the half way point. The biggest reason for this is that we have done a little more traveling than expected this year and we continue to spend too much on groceries. I am confident that we will be able to make some cuts over the next six months and squeeze in under $40,000.

So far, so good. We shall see what the next six months hold for us.

I reached the point that I think many people in debt reach. You look at your balances, you look at your income and you realize that, whoa! If something doesn’t change soon I will not be able to keep my head above water. As a Resident, the majority of us have the benefit of knowing that we will be getting a big raise as soon as we finish Residency. Therefore, many of my colleagues in a similar situation just decided to keep piling the debt on with the assumption that once we finish they will be able to pay these debts off without having to change their lifestyle. This was a very tempting option. The problem was that I really didn’t think I would be able to pay my minimums if I continued to accumulate my debt at the same rate.

After running the numbers it was obvious that small changes were not going to make much of a difference. I don’t drink that much coffee or eat out that much. I first downsized my living space from a one bedroom to a studio. This helped me in two ways. First it made me realize that I had way too much junk that I would never use during residency; and second, it helped keep me from spending money on things I didn’t have space for and couldn’t afford. The biggest cost saver for me however was an obvious choice: get rid of the car.

This is the point that 99% of people stop reading, call me crazy and explain how for them, making such a move is just not possible. I will have to agree that with most people it would be very, very difficult to live without a car. What I am suggesting to consider if you really need (1+) cars for each member of your family. While I debated it for months, I did not sell my car until a few weeks before my wedding when I knew that we would have at least one working car in the family.

I did have some reservations at first, but after seeing an extra $600/month in my checking account I quickly decided that it was worth the inconvenience. We have been able to continue this for a whole 6 months by:

• using public transit and the shuttles offered by the hospital
• walking or riding our bikes when the weather allows(and occasionally when it doesn’t)
• pooling all of our errands into one weekly trip

Will we be able to continue this into the future? This will most likely be determined by where we eventually settle. Most towns and small cities don’t have adequate public transit. Will the roads be safe to ride a bike to work on? How far from work/town will we live? These are questions that we will have to address in the future. Our goal for now is to see if we can remain a single car family for at least the next 2 years.

The only taxes that I feel I could easily avoid and not alter my life all that much would be to avoid the “sin taxes”. More elegant writers than I have sold a lot of books on principles less complicated than this. If you are looking for a catchy phrase for your next book think Avoid the Sin taxes.

It is an easy to follow, healthy, effective way to save money. The 3 items most commonly considered under “sin taxes” are smoking, drinking and gambling. Some people might start to lump gasoline in there soon with all the talk of global warming.

After a little research I learned that they are a remnant of Puritan New England when sumtary laws were used in an attempt to control sin. They covered many things including the regulation of extravagance in food, dress, tobacco and drink.

The actual benefit of “Sin Taxes” to society has been debated but for an individual you could save a fair bit of change by avoiding them.

• In the short term by avoiding products that fall under sin taxes you would eliminate some very expensive habits from your life. The obvious example is smoking. It has been stated before but it bears repeating that at $4/pack a pack a day habit costs about $1465 a year. Plug that number into one of those retirement calculators, and it is a very large number.
• most of these habits tend to have negative effects on our overall health. Keeping with the smoking example, if you smoke for 30+ years and then you get lung cancer at 68. The first year costs of treatment is at least $36,000 on the low end. Hopefully you will have insurance but if not, getting sick is a good way to wipe out your savings.

People could argue that gambling isn’t all that bad until it becomes a problem. I know that for a large number of individuals gambling is the the same as going to a football game or the theater with the added benefit that every once in a while it might cost you nothing.

These sin taxes along with “mental lapse” costs can be pretty significant. Between parking tickets(if you pay them), speeding tickets, late fees, ATM fees, etc… we probably spent over $1000 in 2006 for these “mental lapses”

Our goal this year is to eliminate these completely. I have a feeling it will be harder than we think.

By only showing you the data from 2006 is it tough to truely appreciate how far we have come. (You probably won’t hear that everyday from someone with $140,000 of non-mortgage debt!)
Here is a chart with our expenses after the First Quarter of 2006:

A large proportion of these expenses were related to one time events like moving across the country and getting married:

1. In January 2006 my wife moved to the same city and incurred all the costs one normally associates with moving across the country. Her work paid for some of the moving expenses but not the costs of establishing a new household, thus our household expenses were high for that quarter.
2. As with most couples we had the costs of maintaining two automobiles, renting two apartments and the cost of food. Pretty normal expenses and likely proportional to what most people in a larger city spend.
3. Out of proportion due to the one time nature of the event is the large percentage of clothing and wedding expenses. Combined these made up 15% of our expenditures and were our third largest expense. The good news from this is that we are not stuck paying for these things years down the road plus interest.

Contrast that with our expenses from the first quarter of 2007:

There are some differences to note:

1. The first thing some people may notice is that the total expenses for the quarter have been cut almost exactly in half which in a way makes some sense because we sold or eliminated half of our largest expenses from last year. Most people who get married will probably not see such a dramatic difference.
2. Vacation is higher in the first quarter because we had to purchase airline tickets for two trips that will occur in the second quarter. One of those trips I am expecting a partial reimbursement from my Residency program because it is an educational conference.
3. Utilities are high because we consolidated our cellular plans to a family plan which resulted in a one time, cancellation of contract fee that I was unable to avoid.
4. My wife deserves some recognition for her cost consciousness and for almost completely eliminating our clothing expenses thus far.
5. The large Other category is just a combination of multiple other small expenses like magazine subscriptions, postage, dry cleaning, etc……

We hope to continue on our success so far this year. We are very close to being able to live on just my salary alone which would be a great accomplishment for us.

We didn’t make whole lot of New Years resolutions but the one that I felt was most important to our financial health for 2007 was having a budget and knowing where we were spending our money.

I mentioned earlier that I have used Quicken for the past year but did not find it very helpful in keeping our spending under control and was searching for something better this year. By better I wanted something easy to use, idiot proof and cheap.

Our plan for this year was to use a 3X5 index card to record our expenses each week, keeping the cards organized in a small box. Then at the end of the year we will have 52 index cards to shuffle through.

I can report that so far it has been a success, abiet a one month success. It has been the most useful in helping us eliminate most of our day to day convenience expenses.

I leave the card on the kitchen table and it takes just a minute to jot down what I spent that day. By leaving the card on the table it is easily visable and a good reminder at the end of the day when I have a million things running through my mind.

Big expenses like plane tickets, Rent and insurance really throw off the average but I am continuing to follow those monthly with Quicken. Lets hope our two prong approach will be the ticket to good expense management for 2007. With no real hope to increase our income for about 2-3 years, any change in net worth will be from eliminating outflows and not from increased inflows.

Last week was one of those weeks that I thank those who came before me and the ideas they instituted, which include the ACGME 80 hour work week and the invention of online bill pay. These two developements coupled with direct deposit enabled me to:

1. automatically deposit my paycheck without ever being off during banking hours
2. Pay my Rent, credit card bills and electricity without ever having to check my mail

I would have never been able to accomplish those tasks during normal banking hours which were not intended for anyone working  their way up the career ladder.

My second thought last week was that I don’t think the point of making saving/investing automatic and effortless can be emphasized enough. As humans for whatever reason we tend to gravitate to the path of least resistance. Every respected financial writer makes automating your savings a point of emphasis, yet I still have managed to rationalize not doing yet.

My current reason is that I am using my excess income to pay down my credit card debt and develop an emergency fund before I automate my investments. Is this a rational reason, for me at this time, yes but it does not follow the principle of “pay yourself first”

Once again I have this funny feeling that my life is an example of why markets are not completly efficient and most American’s are not prepared for retirement.

Hope you are having more luck with this than I am.

My wife and I have decided to make an effort to control our spending this year by writing down all of our expenses for the week on a 3X5 index card. It sounds pretty simple and I can see already that it will be useful as long as we make it a habit.

The preliminary report after three weeks for us is that it’s the little unbudgeted expenses that get us. Surprised?

I can say that we way underestimated our discretionary expenses so far. It’s not the monthly grocery bill or rental payment that catches us by surprise. Its the “Oh, I didn’t think I put $1000 on my credit card this month” that is killing our budget.

Where do these expenses come from? Some are the day to day expenses that creep up as impulse buys and convenience buys. Spending $1.50+ for a cold drink every day adds up, but throw in $40 for a magazine subscription and $15 to mail a package back home and it adds up a lot quicker than I realized.

I hope that the weekly note card technique will provide more rapid feedback than budgeting with Quicken which is what I have used in the past.

You are probably reading this and wondering how in the world did he get through that much school and not realize how much money he has been spending. I like to believe my main problem over the past two years has been because of two bad habits:

1. I fell in the trap of justifying my purchases because: “I don’t have the time” or some other excuse.
2. The feedback loop between the actual purchase of an item and the transfer of funds from checking to pay the bill was way too long for me to associate the purchase with the pain of paying for it.

Hopefully these little changes in our weekly routine will help us resolve this problem. As is taught in controlling most forms of addiction, the first step to quiting is realizing you have a problem.

This year will be the year we stop paying for convenience, our main problem.

Here is another post to add to that list.

I have spent the past month getting rid of many of the items I have accumulated over my short lifetime. I wasn’t overly attached to most of them but at some point I must have felt that it was something I needed or was somewhat useful. Some of the larger items like bikes, windsurfers, mattresses, TV’s we were able to sell on Craigslist but we did give a significant amount of household items and old clothes to charity.

A lot of the items were still within what I would have considered their useful life but the criteria we used for getting rid of things was if it hadn’t been used in the past year, we didn’t need it.

This exercise was satisfying in that we now had more space and less clutter but when I went through our expenses from 2006 as separate households, I was amazed by the combined costs we had. The kicker is that a large chunk of these costs included things that we gave away before the end of their useful life.

I feel that most items you purchase other than food and toiletries should last at least 5-10 years. Here is a list of our expenses for 2006 that fell into the category of useful things we gave away.

• Clothes/shoes: We are both at fault here and granted some of this includes some one time expenses for the wedding, etc… but we spent almost $9000!! To me that is a tremendous amount of money to spend on clothes considering that neither my wife or I dress up for work. That money could have funded both of our Roth IRA’s for the year!! This a primary area for saving money in 2007. Just knowing that number should help us rethink some impulse purchases. Goal for 2007: less than $3000.
• Computer/electronics: This category was expected to be elevated somewhat with the purchase of a new computer last year(2006) which should last us until 2010. Still, over $3000 dollars in this category leaves a lot of room for improvement. Goal for 2007: less than $1000.
• household items: this category includes furniture, pots, mops, cleaning supplies etc.. This is elevated because my wife moved across the country with only what she could fit in her car. Once again, over $6000 in this category as well. Goal for 2007: less than $1000.

I highlighted these three categories of expenses because they consisted of items that I feel should be lasting and not in need of replacement very often. Combined these three categories were far greater than our rent for two apartments. Heck, this is more than half my salary for the year. What were we thinking? Hopefully 2007 will be a more fiscally responsible year for us.

Now this is not as revolutionary of a move as getting rid our TV(which we haven’t done). No-one blames the microwave for the childhood ADHD, obesity epidemic, etc… Living without one however really gets you thinking about what you are eating.

We have really adapted to life without one very quickly. Neither one of us eat a lot of overpriced instant foods and we don’t have a stack of microwave dinners to heat up. To survive we dug up an old kettle to boil water with and in the event that we need to reheat food we just do it in a pot on the stove.

Does this move save us any money? Not really, we already had the microwave and it doesn’t use that much electricity so I don’t expect to see any savings there. We do save a little money in that most of our grocery costs are basic ingredients but that was something we were doing before. I guess the biggest saving is space, which is something we desparetly need right now.

Anyone else considering making the jump?

I had been planning on getting out of my current cell phone contract for the past six months in anticipation of reaping some cost savings with a family plan once I was married. Cell phone companies do their best to keep us from switching with large early cancellation fees and I was determined not to pay one. I had been doing some reading on how to get out of a cellular contract early but I had been unsuccessful in finding any loopholes.

My wife however, managed to speed up the process a few weeks ago by dropping my phone into the sink.

To make a long story short, the phone didn’t work and I needed a new one quick because I used it for work. I went to the local store and tried to buy just a phone without renewing my contract because I only had about 9 months left. I was unsuccessful at getting a reasonably priced phone from them so I decided to just pay the fee and get out now.

Here are the finances behind my decision:

1. New phone with old company $100-$200.(without renewing my plan)
2. New phone with new company $20(after mail in rebate)
3. Phone bill with old company $73/month
4. Phone bill with new company $12/month(additional line charge)
5. Early termination fee $175/9 (~20$/month for the first nine months)

Basically it was $32/month to switch for the first nine months and $12/month after that vs my old bill of 73$/month plus the cost of a new phone. I hate to pay that $175 but I still come out ahead just not as much as I wanted. Kind of like selling a losing stock, its hard to convince yourself that a large loss now is better in the end. I hope you will have better luck than I did.

The biggest mistake took the longest to resolve but that is to be expected. Over the course of 2006 I had already managed to organize my expenses using Quicken and at the end of December I added a roommate(my wife) to help share living expenses.

By selling my truck a few days before Christmas, I managed to rid myself of my second largest expense for 2006!

I had managed to justify the purchase at the time but over the past 2 years owning a new car has been a large drain on my finances. I decided that to see real change from my current situation I needed to change my expenses in a major way. The usual advice of “don’t get a daily latte” and “pack a lunch” would not apply because the proportion of my income eaten up by these expenses was tiny compared to the big three of Rent, Transportation and Food. My housing situation currently is great and I am slowly controlling the costs of food. Therefore transportation offered the best opportunity for savings in the next year.

Because I have not used the truck very much and it was in good condition I manage to sell it for a very reasonable price. With this money I was able to do a couple of things.

• I paid off the balance of my auto loan

• I will be able to pay off 70% of my credit card debt

• I was able to free up 13% of my monthly cash flow for savings and investments just by eliminating the monthly note.

I will put the extra cash into cash savings for now and will pay off my credit card balances as my 0% transfer offers run out. It won’t be much but by leaving this money in savings and not paying off my debt right away I should be able to squeeze a little bit of extra interest on the money. This should help set the stage for great things to come in 2007!