Your Money: How to make personal spending decisions

April 18, 2008

Whether you have enough money may have less to do with how much you earn and more to do with how you decide to spend it.

Key Points

Perhaps you see another doctor buying a snazzier car, taking more exotic vacations, or living in a luxury home, and think, "He (or she) must make much more than I do."

That's not necessarily the case. He might just be making different spending decisions. Some folks' philosophy is "live for today, life is short," and their bank account is almost bare. Depending on money choices, a doctor making, say, $180,000, could end up in debt, while a doctor earning $150,000 could be in the black and have a nice nest egg.

How much you end up with depends more on how you manage your money than on how much you bring in. In today's healthcare climate, the answer isn't always, "If I want more money, I'll just try to make more." You may already be doing all that you can. Sometimes, the real issue is how you handle personal finances.

Now picture a family with an income of $180,000. They took on a $400,000 mortgage, borrowed more to remodel their kitchen, and both husband and wife own top-tier cars. They also take several vacations and don't stint on household help or dinners out. As a result, they have little in savings, nothing toward college, and steep credit card bills.

Align goals and actions

No matter how much you earn, you face crucial decisions. To make sure your income covers what you truly value in life, you need to match values and actions.

Here's an exercise I find helpful: Each partner should separately complete a financial goals worksheet, like the one on the next page. (Make two photocopies, so you and your spouse can work independently.)

Next, you or your financial adviser should analyze checkbook entries and credit card statements to see exactly where your money goes. Nearly 90 percent of the time, your actual spending doesn't match your stated priorities. (Programs such as Quicken or Microsoft Money can be used to categorize expenses.)

It's a real eye-opener when the husband's No. 1 stated priority is saving for retirement and the wife's top goal is saving for the kids' college education, but their checkbook shows that they're vacationing both away. Or that the golf club membership is driving them deeper in debt.

Once you've analyzed your goals and spending, you and your spouse need to find common ground and, if necessary, determine what your true priorities are-or whether you're just giving them lip service. You may need to resolve budgeting and spending issues, and develop a plan to head in the right direction. Often a few small steps-such as cutting back on dining out, entertainment, and vacations-can get you back on track. There are always affordable alternatives.

More difficult fixes involve taking tough steps to halt unrestrained spending. Some families find that in order to achieve their goals, the non-physician spouse needs to take a job or find a different job-with longer hours and higher pay.

The exercise can serve as a wake-up call, reminding a high-spending partner to cut back on purchases, although it's hard to change someone whose profligacy is entrenched. I know of one doctor's wife who bought a $10,000 chandelier while the IRS was threatening to padlock the husband's medical office for nonpayment of payroll taxes.