Speaker 1 00:00:08 What's up, everyone. Welcome to the finance for physicians podcast. I'm your host, Daniel Raimi. Join me as we dig into what it looks like for physicians to begin using their finances as a tool to live better lives. You can learn more about our
[email protected] let's. Jump into today's episode, what's up, everyone. Hope you're having a great day. Appreciate you joining me today. I'm excited to talk about a topic that seems to be regularly coming up in the discussions I have with clients, and also in my own life, it seems to just always kind of re crop and, and that is building in margin in your personal finances. So I'm going to talk through what that is, clarify what I'm talking about and kind of how it can negatively affect your situation and how you can kind of work around it and ideally, you know, avoid it if possible.
Speaker 1 00:01:03 And I think it's going to be helpful to kind of understand what this looks like and ideally, you know, make life, look a little bit better and easier for your situation. So we'll jump into talking through that now. All right, guys, this is going to be especially helpful for those of you that, um, are kind of lean towards perfectionists. Um, I'm guilty myself, um, or maybe you're analytical the analytical types out there. Uh, this is, I think it's, I think this is going to resonate with, with, uh, those of you that would consider yourselves in those categories. So the classic example of what I'm talking about when I say like building in margin into your financial lives. So the classic example, I think I would first describe is when we're talking about budgeting or just kind of maybe more broadly, like, what are you doing with your money, uh, your day-to-day financial decisions, how are you deciding how much you're going to spend and that sort of thing.
Speaker 1 00:02:08 So anytime like the, uh, analytical per, you know, lean towards perfectionist types, start to talk about like knocking out a project or task it's going to be, you know, we're going to really jump into it and we're going to want to make sure it's like correct and perfect and, you know, lined up well and all the numbers add up and that sort of thing that can work really well in some areas of life. But when you start talking about financial aspects of your life and especially like things like budgeting, it definitely is problematic. Uh, you know, life happens and we're pretty much setting ourselves up to, to, to have failures or disappointments when we, um, you know, set things up this way. So what I'm talking about, so let's say you're, um, you know, ironing out, you know, where your, where you want your budget to be, or how much you want to spend.
Speaker 1 00:03:09 So the classic, uh, the classic mentality is like, okay, I'm going to think of all the categories where I am spending money and I'm gonna, you know, write it all down or kind of document what my estimates are of those each of those categories. And maybe even look back at prior periods and try to verify like how much I'm spending in those categories. And maybe you're thinking about for the future, like maybe you want to spend in other categories. So the gist of it is you're going through kind of this thought exercise of thinking about all these different categories and how much you would ideally like to spend or have been spending in each of them. And oftentimes, you know, you're going to get pretty, you know, a lot of, a lot of people will get very specific. So for example, if I'm on like the gas, uh, home, uh, gas costs or home utilities or whatever, I'm going to say, okay, well, let's look at our power bill for the past 12 months.
Speaker 1 00:04:16 It's a average is $132 and 57 cents. Boom, that's my budget for the, uh, gas let's look at electric, it's been 227 and 50 Doosan's. Then let's put that in there. And so that's the makings of this type of budget, um, that I'm talking about. Um, and that's, that's like generally good. That's not like necessarily bad. Um, but so you work through kind of all these categories and you line out like what you would kind of after you go, go through this process, especially if this is like the first time you're doing it, you're feeling like good. It's maybe, you know, maybe it's even perfect. I mean, it's like, I've covered all the categories I got, I got all, I, you know, I think I've thought through most things and, um, it seems pretty solid, but what happens is, well, first of all, you start to get into the harder to quantify categories, like dining out, or maybe even, you know, hobbies or, you know, fun stuff.
Speaker 1 00:05:13 Uh, more generally that's that stuff starts to become more difficult to predict. And your past is not always a good indication and, you know, that's where your lifestyle tends to creep up or increase in. And so maybe you do rough estimates there and, and maybe you use kind of like your gut feeling about it, or maybe you do look at the past and that's, you know, uh, probably a little better indicator, but those numbers start to get less, uh, solid. And, and then on, on top of it. So even if you feel like you've addressed all the categories, what happens is we start to go through life. And first of all, things go up in costs. Like things get more expensive over time. Second of all, like we always, as humans tend to forget little things, uh, or new things happen. And so you're pretty much guaranteed to, to undershoot using that strategy.
Speaker 1 00:06:14 In fact, I've done it a bunch of times with people like families that we work with, gone through the budget, estimates with people, and it's almost always an undershot, like underestimated the expenses they think they're spending or think they're going to spend. It's almost always under what they actually end up spending. It's like, uh, I can, uh, I can pretty much predicted now maybe 95, 90 to 95% of the time. Now, occasionally we are working with people that, that, that don't do this. And so I'll talk about what, what that, you know, how that happens or what that looks like. But when you try to run a perfect budget, you're setting yourself up to, to fail because w you know, life happens, you're going to go over on categories, new, stuff's going to come up, you're going to have categories of stuff you forget to count for.
Speaker 1 00:07:05 And that's just the way things go. So what happens when you go over budget? First of all, it's like kind of a disappointment. It's a chip on your, you know, you, you, you feel bad about yourself a little bit, and, but maybe it's been, you know, maybe it's the first time you've done it. And you're like, well, let's go back to the drawing board. We're going to re we rework this. The problem is that in a lot of cases, you're not quite sure what the underlying root cause is of you, you know, going over budget or overspending, or however you want to describe it. So you're going back to fix the problem, but you don't quite understand what's causing the problem. And so the tendency in that situation is, is just to say, well, you know, I, it's simple, uh, spend less, make more, you know, cut my expenses.
Speaker 1 00:07:56 So let's just go back to the budget, let's start cutting things, but that doesn't actually change anything, um, necessarily, it's just kind of, you potentially setting yourself up for even more disappointment in the future. So you go back to the drawing board, you cut a few expenses, or you say, you know, we forgot this category, or we've been getting a little loose on our dining out. We're going to do better with that. And, and that sort of thing. And, and then you go for round two, but you haven't yet addressed this root issue of not really, you know, building in margin. And so now before we keep going, just to clarify, now, there can be like other root causes, besides what we're talking about now in building in margin, there can be other root causes. Like you're just, you're, you're just, you have uncontrollable spending.
Speaker 1 00:08:50 There's, there can be some like major issues that are completely unrelated to this. So there's all kinds of root causes that can be problems here. But for today, we're talking about the root cause being, you know, failure to incorporate or build in margin into your financial life. So I would say this is probably the most common issue. Um, but just to clarify, it's not always, you know, there's, there's exceptions where this is not in play so way. You're going through the second time. And same thing happens just, you know, all over again. And it gets even more disappointing and you start to be like, man, this budgeting stuff sucks. It's like painful. I go in and feel like I did a really good job setting all these numbers, but I always go over like, and that sucks because I don't hit my goal and it's a disappointment.
Speaker 1 00:09:42 Why would I ever continue to do something that's painful? I'm going to give up on this, this sucks. And I'm just going to kind of do my best or save first and spend the rest, or, you know, whatever sucks I'm out and you give up and that's kind of the, the cycle. Um, and, and you don't pay attention to your spending at all. I've seen that happen a million times. That's, that's, that's a common occurrence. So the second, so that, that's the first example. There there's another example I wanted to talk about that. Um, you know, it's a little bit of a different flavor of this, but, um, but the same underlying issue is like not building in margin for, uh, planning and your finances. Um, but this is a little bit more like future oriented. So second example, let's say it still revolves around, like, you're still looking at like your, your spending, but let's say you're approaching a future bigger decision and maybe, maybe buying a house, that's always a biggie.
Speaker 1 00:10:42 So maybe you're thinking about buying either your first home or an upgrade or whatever. And so you're in that, in the thick of that process, you're, you're doing all the homework, you know, coming up with a budget for the house and you maybe you've done a good job, like adding that into your budget. Like you've looked at your prior budget and you've said, okay, this here's how much room I have in my budget for this new home, or, you know, potential upgrade or first home. And it looks good and you've set your, your, a target price range. So in this situation, a classic situation with these big type purchases, especially that, uh, I mean, really any of them, but big purchases like house, we always tend to undershoot the numbers in this situation as well, and, and, and fail to build in margin and, and or think about all of the expenses.
Speaker 1 00:11:46 So with a house you tend to think about, well, mortgage principal and interest payment, straight taxes, kind of straightforward insurance, eh, a little bit more straight, you know, not super straightforward, but most people account for it. Um, but then you get into utilities are a little harder to budget, hard to know what it is, but you can do it. And then, and then even harder is like maintenance and upkeep, um, or improvements. Uh, that's kind of more of a, you know, as you choose thing, but houses, oftentimes I've talked to many, many people that say, man, I didn't realize we were going to spend so much money on the house. The house has kind of taken over their spending. So, um, it's extremely rare that, and I think it's almost like psychologically difficult when you're in the heat of that decision to build in margin for things like that.
Speaker 1 00:12:47 The reason is subconsciously is that, you know, that if you're going to build in margin there, that's going to reduce the amount you can afford. I think, I think subconsciously that's the number one reason we're failing to do that. And probably the same reason we're doing it in the budgeting example before is we're just like, you know, I want to get all my other categories exact so that I can have more money to leftover to spend or do whatever else. Maybe, maybe you want to save it or whatever. But so we're in the house, we're in the heat of the house decision. We're looking at all the numbers, but when you start to get to categories like home maintenance, you're like, ah, it can't be that much. And, but that's not based off really any scientific evidence. It's just your feeling in the moment. And the feeling of the moment is I want to get a nicer house and I'm gonna, you know, I'm not going to worry about that.
Speaker 1 00:13:44 And so, and then just home stuff in general, like improvements. If, you know, if you want to, maybe you're buying a house that needs a lot of work, the question would be like, have you financially modeled that out into the equation? How's it going to get financed? And so what happens is if you don't, so the, you know, average, the natural tendency is you go through that whole experience. You don't build in any margin, you get like the exact numbers for all the known expenses. You buy the house, it's great, but you get in the house and then life happens. Same thing, extra stuff, either blows up that you didn't think about, like the, you know, fireplace is leaking and it didn't come out in the inspection or there's mold, or the tree gets blown down and you're like, oh no, I didn't know. It costs $3,000 to get it tree taken down or moved out or, you know, whatever, you know, plumbing, there's all kinds of stuff.
Speaker 1 00:14:49 And you guys are all busy, so you don't have a ton of spare time to be like chains on trees down in your backyard. And you probably shouldn't, even if you did have time, but life happens and houses are extremely expensive. And especially if you haven't owned them before, or if you're upgrading, it's hard to know like what it's like, because you haven't experienced it. Uh, so that's probably putting you even, you know, even at a more disadvantaged position, you know, knowing the situation. And so w what it really comes down to is there's a, there's a little bit of like, you know, not thinking through all the categories, but I think what it really comes down to is just giving yourself more wiggle room and building in all that margin. And so with the house, when you do this, you get, it ends up kinda same sort of situation with the budget.
Speaker 1 00:15:44 You get, you feel like let down. So you feel like, man, I wish I had known this house was going to cost me this much money. Or, um, man, if I'd known it was going to be this much, I would have done something differently or I didn't realize, you know, I'm making a lot more money now. It doesn't feel like I have that much to show for it. Those are the common, like things you hear after this is like, you know, I didn't realize it didn't, I didn't expect it to shake out like this. That's, that's kind of the end result of this. And you also feel kind of like you missed the Mark A. Little bit and it makes you not, you know, super excited about digging into it again. So these are very similar, um, underlying issue, you know, underlying causes the good news about all this is it's very, very simple and easy to fix it and straightforward.
Speaker 1 00:16:39 And I, everybody can start doing it like immediately. It's a super simple solution. All you have to do is for further your budget for your day to day finances, just in finances in general, start thinking from this mindset of like, it doesn't have to be perfect. In fact, it's not going, it's impossible that it's going to be perfect. And I need to go ahead and assume it's going to be a little bit of a mess and I'm going to build in a lot of margin. And so whatever you're thinking. So I have worked through this exercise with people. So let's say you're, um, so let's talk through specific examples for each of those, those two examples I gave and how you might ideally do this. Um, so building in margin, so let's say your, your spending or your budget is $10,000 of spending a month and that's the projected, you know, lifestyle.
Speaker 1 00:17:38 What I would encourage you to do if you're a pretty good analytical, you felt like you did a really good job, estimating the expenses. I would go ahead and build 10% margin. And so that'd be, you know, a thousand dollars a month on top, so 11, so make the 10 11. And that way you're planning your, you know, assumptions, your everything you're doing instead of using the 10 years, you're using 11. So your decisions, your planning, your assumptions, if you're working off that 11 number, you're way more likely to set reasonable assumptions and make better future decisions about bigger things. And, um, also not let yourself down now, if you're a, I'm not a, I'm not like a hardcore budgeter by any means. And in fact, I actually like, I would, I think most of you don't, don't have to budget. You make plenty of income and you not something, especially if you're hitting your goals and your life's good, why there's no sense like counting all your pennies every month.
Speaker 1 00:18:44 Um, so if you're the type that's like, kind of resonates with that. And you're like, eh, I don't, I don't really want to count my pennies. I'm not super into the weeds. I'm kind of rough. I want to do rough estimates. Um, that type of person, I would probably go with like 20% margin, uh, instead of 10% margin, the reason is it's just, your numbers are going to be not quite as exact, which is all good. Like, especially if you're going to build in this margin, you know, your numbers will be still pretty close, but like, so maybe you bump it up to 20% of, uh, extra margin, worst case scenario, you overestimate your expenses and you're pleasantly surprised that's a far better situation than undershooting and being disappointed. So you just got to start to get in this mentality of like, I am going to build this extra margin in and it's not like I am, you know, throwing away money.
Speaker 1 00:19:41 It's just making it, you know, I'm setting more realistic expectations now in the house scenario, same sort of thing. Like you're getting into that, uh, phase of making the big decision on whatever it is, you know, in this example, it's the house. So looking at the cost of the house, first thing is you got to make sure you're hitting all the categories. So mortgage interest, principal, um, taxes, insurance utilities, those are all the simple, straightforward, relatively straightforward things. Um, I would encourage adding in like 2% of the total value of the account of the house as a maintenance costs. So, um, that's just to keep the house in the condition. And this is just like what the real estate experts say, uh, is a good rule of thumb, but like 2% of the value. So if you're, if the house is a million dollar house to 2% of that is $20,000 a year, so that's the annual maintenance.
Speaker 1 00:20:38 So a hundred thousand dollar house, 2000 a year, annual maintenance. So that's kind of a rule of thumb for maintenance. So make sure to get all the categories, get all those minimal categories accounted for. And then on top of it for the, especially, if you expect to, you're going to need to put in some work into the house, build in that, uh, you know, improvement fund. And so whatever that is. So you do the financial numbers for it, like, um, you know, model out, like if you need to do a bedroom and bathroom remodel or whatever, just rough, rough estimate, the cost of it and say, you know, I'm going to do it in this amount of time or that amount of time start to come up with like a monthly amount that needs to be dedicated to that. So whatever that number is, I think a good, safe way of building in margin here.
Speaker 1 00:21:28 Just double it. So double the improvement amount and that way you're, you know, cause that's, so that's the category that tends to like eat up the spending. So what's going to happen is when you start to go into the decision-making process for the house, when you build in that double, the normal number of, uh, improvements. So you've doubled the amount you were going to spend on improvements. It starts to kind of make you think twice about like the budget. So you're like, can we really afford this million dollar house? Maybe we should really look at a 700,000 our house and it gives you a more realistic expectation and assumptions are more in line. So worst case scenario, same thing, worst case scenario is you are like pleasantly surprised that you have a little bit more wiggle room than you thought you were going to have, which really only gets you in a position, good position of being able to do things sooner than you thought.
Speaker 1 00:22:29 And you're avoiding that worst case scenario where, which is very common, is where you underestimate the cost and then fast forward your own you're in the house and you're stretched too thin and you're frustrated and you have a house it's like incredibly difficult to get rid of. So do yourself a favor, think about these things on the front end, build in margin, whatever you think it should be, make it even higher than that. Double it. I mean, like give yourself a lot of margin and that way you're going to be, especially that. So the earlier you are in your life or your financial life, um, the bigger, I think the number should be just because you don't have a lot of experience doing this stuff, you can always like adjust the number downward after you have had some time of verifying things. So avoid the temptations we all have of like making the budget perfect and analyzing it and getting it all kind of correct.
Speaker 1 00:23:29 And just, you know, build in that, just extra category of this is for margin it's wiggle room and do it for a while. And I'd love to hear back from you. Like I have, I'm very confident. You'll be happy about it on the backend, like fast forward a year or so from now. Um, I think you'll be much happier. You'll feel better about it. You'll feel more flexible, but just try it out for a little while. I'll see how it's working out and I'm confident you'll have better experience with things. You'll feel better about your results. And that's really what we're after. I hope this has been helpful. And, uh, we look forward to chatting again next as always. Thank you so much for joining us today. If you found this valuable, please give us a review on iTunes and share with a friend. Also check out our
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