Zero-based budget with high income

By Alaina Trivax, WCI Columnist

During his stay, my husband, Brandon, and I fantasized about what our lives would be like when he finally became a participant. We would think about the participating paycheck – just one paycheck would be more than our combined monthly income at the time. What were we even going to do with all that money? We envisioned a life where we had tons of money—and assumed we could never use it all.

Brandon is now a third year PMR working in a private practice while I work as a middle school teacher. Together we have two young boys.

We met just before he started residency and got married two years later. Back then it was just us and our dog living in our little home in the suburbs of Detroit. Between his living wage and my income, we were completely comfortable financially. We are both quite conservative with our costs and to begin with we didn’t have much of a budget. We had some goals, including paying off student loans, but we were pretty casual about our financial lives. It was easy to think that we would always have plenty of money and not have to operate from a tighter budget.

The joke was of course on us. After completing his residency, Brandon pursued a one-year out-of-state fellowship in brain injury medicine. We quickly found that maintaining two households – without much additional income – really put a strain on our finances. We started tracking our expenses and with a few adjustments to our expenses we got through that year. Since he’s been around, we’ve continued to use a budget to manage our spending. Each month, we create a plan for every dollar available to us—all the money in our checking and savings accounts and our expected income for that month.

The life we ​​imagined where we could never spend a ton of money has not been a reality. Expenses have started to increase rapidly and we have had to adjust.

Do you need such a strict budget to reach your financial goals? May be. Maybe not. But hear me out – here’s how and why our budget plan works.

A zero-based budget

We use a modified version of a zero-based budget, where all funds are assigned to a category for consumption, savings or investment. The goal is for the budget to be “zeroed” every month. In this format, all expense categories are listed, and only the money that is currently available for spending is accounted for in these tasks. Monthly and recurring expenses receive a set amount; Variable costs are also budgeted for. Plans are made for future expenses, both large and small, and money is set aside for these categories. Whether it’s the monthly cable bill or Christmas gift giving in December, money is allocated to these costs.

There are many other budgeting formats – the envelope system, a pay-yourself-first structure and more. We landed on this model because it enables us to prioritize multiple goals: spending our money intentionally while tackling our student loan debt.

In a typical zero-based budget, expected income does not count. If there is not enough money for all expenses, funds are allocated in priority order. The electricity bill is due on the 5th and the car payment on the 17th? Guess we have to pay the electricity bill first and then start putting some money aside for the car – and hope nothing else comes up. This strategy can be helpful for people who live paycheck to paycheck and struggle to make ends meet each month.

If you’re making money from participation, hopefully this doesn’t sound much like your current financial situation. Ideally, you’ll have enough in the bank to tide you over for a few months, along with some emergency savings and investment accounts. This kind of financial triage and stress can bring some flashbacks from medical school or residency; that was certainly something we experienced during Brandon’s fellowship year. The zero-based budget format makes it clear where every dollar is going, and it’s helpful for people trying to tackle significant debt.

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Hacked: Planned Income Account

This is where we break the rules: instead of just accounting for the money in our bank account today, we also include any planned, predictable income for the month. From there, we map out our expenses.

We use You Need a Budget, an online budgeting software, to track our income and expenses. To account for our future income, I manually deposit each of our paychecks at the beginning of the month. When the check clears on payday, I update the date. This allows me to ensure that every penny is spent with purpose and in line with our financial plan.

Too intense? I get it – we’re a bit careful with our finances. Here’s how it helps us

Get the most out of your participation money

We earn so much more money than at the residency, but where does it go? Despite our confidence that we could never use everything, we’ve found that it’s actually quite easy to do. With two children and a home to maintain, an increase in expenses has crept up on us. Compared to the community days of homemade hummus and date nights, we’re doing fine—but we’re still looking at our budget as, “How are we going to send these two kids to daycare?” We’ve tried to maintain our previous lifestyle, but the small changes – an increased grocery budget and more funds for going out to eat – add up. Planning ahead using this zero-based budget model helps keep us on track so that we still meet our financial goals at the end of each month.

Consider fun expenses and giving

My husband worked hard to get to this level and to earn the income he does. After years of training, it’s time to enjoy the results a little. We use our budget to allow for spending on fun things too. Brandon has been trying to hone his golf game this past summer. He hits the driving range every Wednesday afternoon, and he has brought training equipment to practice with at home. These are the kinds of expenses that wouldn’t fit into our lives on a housing or stipend income, but we can make room for them now that we have more money. Planning for these expenses in your monthly budget sometimes means limiting your spending – maybe not buying all the new golf games on the same day! – but also ensures that we stay on track with our financial plan.

Know the limits and feel confident about expenses

While Brandon has been working on his golf game, he decided he wanted a home golf simulator. Apparently, they can get pretty expensive – anywhere from a few thousand dollars to tens of thousands; the one he was interested in was somewhere in the middle of that area. He looked at our spending plan and realized that this type of purchase just wasn’t affordable right now. Technically, we could afford it, but something had to give – and we’re not ready to rearrange our financial priorities to buy a golf simulator. Instead, he’s going a more DIY route and making his own simulator set up in our garage at a price we’re more comfortable with. This is an expense that fits into our budget, and as long as we stick to that plan, we can feel confident about our costs.

Stay on the same page

Dr. Jim Dahle has often pointed out that divorce can be financially devastating. Making a plan for our money even when, or maybe especially when, we have a lot of it helps Brandon and I stay on the same page. There is no need to wonder about the little splurges and expenses. He eats Tropical Smoothie for lunch most days of the week – regardless. I enjoy a good happy hour with my girlfriends – and am happier for it. We’ve certainly had times when we’ve been stressed about money, but I don’t think we’ve ever fought about it. Having a budget takes some of the emotion out of it. When we have to say no to an expense, it is the budget that lays down the law – not the other person. We get to stay on the same team.

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Worth a try?

Keeping a close eye on our expenses has helped us continue to “live like residents” even as our income has grown. Nevertheless, it is difficult to say whether we will use this system forever. We do this with a purpose – we have specific financial and lifestyle goals that we strive to achieve. We want to pay off Brandon’s medical school loans – but not just to pay them off; eliminating that debt will free up the cash flow we need to afford a larger home better suited for our growing family.

I know I know. We are a little intense. But I promise, using this modified version of a zero-based budget has been incredibly helpful for our finances and our relationship.

If you find that your money isn’t going as far as you imagined—or as far as you need—try this.

Did you find that using a budget, especially early in your career, ultimately helped you build wealth? Why or why not? What kind of budget did you use? Comment below!