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Sample Budget – What Could You Cut?

Cutting the budget of a $500k/year medical practice

Here is a budget I came across recently, totaling $10,550/mo for one person. It might seem like a lot of money but it’s fairly standard for the majority of the docs I know.

This doc is self-employed making a little under $500k/yr. Let’s not worry about the income, let’s talk about his expenses first.

Unexpected expenses

Looking at this list of categories, I don’t see listed are all the miscellaneous shit that creeps into our budgets.

  • vacation expenses
  • replacing medical equipment for the business
  • buying gifts for family
  • helping out family financially
  • car maintenance/repair
  • extra driving/extra gas
  • speeding tickets
  • medications/healthcare expenses/dental care
  • electronic gadgets/replacing cell phone
  • home products such as furniture and kitchen stuff
  • renting movies, watching in theaters
  • hobbies/taking courses
  • personal care/massage

 

I’m not gonna factor the above into the equation because that’s not the point of this post. I am trying to review a this real and sample budget to gain a little perspective.

Imagine if this person made only $250k in their business how would their expenses change? After talking to so many of my colleagues I can tell you that all that changes is some percentages.

That’s why I put those percentages in the last column. Business overhead of 40-50% is fairly average for an independent physician contractor. If the medical business is making less money the percentage would stay the same, the take-home pay would instead be lower.

All the other categories are fairly accurate for the average US household. Housing, automotive, health and entertainment.

How much could this person cut?

Well in this particular case their sense of happiness comes from being able to spend the amounts they are spending in the corresponding categories. They would consider making some minor tweaks. Going from 2 cars down to 1, cutting their cable bill a little and perhaps doing less shopping.

Those actions likely would reduce expenses by $1,000/mo which probably isn’t even worth the effort. Saving $1,000/mo in the shadow of $10k of monthly expenses will not make a substantial difference in this person’s life.

What about the argument that it’s deductible against income?

Absolutely legit. There is a lot you can write off against your income in your own business. However, income doesn’t just flow in for us professionals because we have some intellectual property. For us, we trade free time, stress, and energy for income.

So sure, you can work a lot, make a lot and thereby write off quite a lot against that income. In my opinion that’s how the tax-code was designed, to encourage spending. It’s perhaps the main reason people work as hard as they do when they have their own business.

Let’s look at it from another angle. If this person makes $400,000/yr and spends $120,000/yr then they are probably writing off around 60% of those expenses against their income. Then after taxes they are left with $165,000/yr or $13,000/mo.

The problem is that an expensive lifestyle such as the one above doesn’t lend itself well to tragedies. Losing one’s main source of income or needing to cut back due to health reasons could create a financial disaster for a physician if one is used to spending $10k/mo.

Even if the person could cut their expenses back intentionally in order to cope with the decrease in income, it would likely be a huge shock to them. Most of us consider our jobs to be quite secure. Unfortunately it only takes an economic downturn or major health law changes to drastically drop our incomes.

Defining the bare minimum for living a satisfied life

I mentioned a few paragraphs ago that this doc derives his pleasure from spending on the categories above. Could he change this? I ask because that’s sort of what I have been writing about a lot, haven’t I?

I believe that every one of us could find pure happiness, peace, satisfaction, or whatever else you want to call it, without having to spend on anything but bare necessities.

Bare necessities to me is food, shelter and access to healthcare. Food can be a few items a week from the grocery store, but I don’t mean $150 dinners out. Shelter could be sharing an apartment with a few other people or a modest condo in a strategic neighborhood and not a $1.5 million dollar house up on a hill behind gates. And healthcare, well we all know about healthcare.

But maybe that’s just my definition of happiness, in which case I can see how someone can justify working their ass off to run a few medical clinics, manage some rental income properties and invest their money on Wall Street.

What would this doctor have to lose if they tried living on less? I know, he already has the cars, has the rented apartment, has the nice gadgets and toys. Giving it all up is a big waste of money if they end up just having to replace it. And you can’t just put everything in storage, it’s not the same.

The reality is that many of us have thought about it, few of us have tried it. I have such a hard time believing that a person would be miserable if they took their life down to the bare essentials.

Balancing income and lifestyle

So if this doc decided to see only enough patients to still be able to write off the majority of their expenses and set aside a sizable bit of money then I think he would have less stress at work, more free time and probably even easier cases.

When you own your own business the reality is that you are usually taking home less money than you think because you are losing quite a bit to taxes and whatever you could keep, you are writing off as business expenses – sure, there is a lot of wiggle room to write them off but remember, something that’s ‘written off’ is not something you can save.

Cut back on the income, cut back on the expenses

A self-employed doctor making only $200k would have a lower overhead of probably around $3k/mo, a lower tax bill and if they could curb their expenses they would have the ability to stash away quite a lot more money.

So that’s $3,000/mo or $36,000/year of business expenses which can be deducted straight from the business income, leaving a taxable amount of $164,000. Deduct cell phone, health insurance, and dining out and you are left with $154,000 for the year. Auto expenses can be deducted, let’s say $1,800/yr, leaving $152k as gross and taxable income.

For that single doc, $152k would be taxed at around 28%, including state and federal (you can use Turbotax to confirm). So he would be left with $108k of after-tax income which is $9k/mo.

The outcome for this doctor

I have been friends with this person for quite some time. They only shared the details of their business with me a year ago. My initial suggestions came across a bit too aggressive and so he continued on as before.

Sometime this month, this physician decided that they can’t sustain this kind of lifestyle and so we revisited his situation. I’m happy to say that after sitting down and doing the math for himself he came up with very similar numbers. He has a plan on cutting back a few offices in order to live the life he’s always wanted but was too afraid to have.

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