Why Budgets Don't Work for Doctors and What To Do About it...

As a Doctor you  can earn a lot of money and that can
sometimes give you a bit of a false sense of financial security. It’s totally normal to upgrade your lifestyle as your paycheck grows—something we call “lifestyle creep.” But the tricky part is that it can sneak up on you, making it tough to really keep control of your cash flow.

If you run a private practice, it’s easy to lose track of what you actually own or owe. Your tax bills and other expenses can feel like moving targets, especially in those first few years when your income keeps climbing. Even if you’re paying tax installments regularly, you might still face a big surprise tax bill when the year’s done. So, staying on top of this with your accountant is key to avoiding nasty shocks.

From what I’ve seen, the best way to manage your money is to set clear financial goals with clear deadlines and then create a plan to fund those goals. Think about things like:

• Paying off your mortgage 
• Building up your retirement savings
  
• Regularly putting money into investments
• Saving  for your children's education

By doing this, you naturally control your spending and make sure the important stuff gets covered first. Remember, it’s not just about how much you make—it’s about what you actually get to keep!

Now, I’ve worked with quite a few medicos over the years. Most have long, successful careers and earn more than most people, but surprisingly, many don’t end up retiring with as much money as you’d expect. The big issue? Their high, steady income. It’s a double-edged sword: when you earn well, it’s easy to spend freely, and once you get into that habit, it’s hard to pull back.

Take Bill and Sue, for example.  Bill is a specialist with a mix of private and public work. We’ve talked many times about cutting back expenses, but it’s a tough sell. They see friends driving fancy cars and taking overseas trips twice a year.  Bills passionate about cycling, and he spends on bikes and gear, too. They live in a large home in an expensice suburb with an even  larger mortgage . Plus, with their kids in private school, school fees are becoming a real expense. Sue's heading back to work part-time to help out, but they know they’ll have to make more sacrifices.

Managing cash flow is where a lot of doctors struggle, especially in private practice. But it’s so important to get a grip on your money early and keep spending in check. Let’s dive into why this is such a common issue.

The Tax Instalment System Explained

If you’re self-employed, like most doctors in private practice, you’re required to pay tax in installments throughout the year. This system—called Pay as You Go Instalments—is designed to prevent you from racking up a big tax bill at the end of the year. Since employees have tax automatically taken out of each paycheck, the tax office expects self-employed people to pay quarterly.

Here’s the catch: these installments are based on your last tax return. So if your income is rising fast—as it often does when you start private practice—the tax office might underestimate what you owe. That means even if you’re making regular payments, you could still face a big tax bill at the end of the year when everything gets settled.

For example, Andrew started private practice in 2023-2024 earning $240,000. The next year, his income jumped to $450,000. The tax office’s quarterly installments were based on his previous lower income, so he ended up with a massive tax catch-up bill when he filed his return. This catch-up means he owes a lot more at once, plus his future installments get bumped up to match his new higher income. It’s easy to get confused with all these moving numbers, and it can cause real cash flow headaches.

The best way to handle this is to work closely with your accountant  —so you know what’s coming and can plan ahead.

Budgeting That Actually Works

Let’s be honest, sticking to a budget is tough for most people- especially Doctors. That’s why we recommend a simple approach called “pay yourself first.” Basically, you decide how much money you want to save or invest each pay cycle, then move that amount into a separate account right away—before you even get tempted to spend it.

Here’s how to do it:

1. Set a clear goal with a deadline.
   
2. Figure out how much money you need to reach that goal.
   
3. Calculate how much to save each month or paycheck.
   
4. Set up an automatic transfer from your main account to a dedicated reserve account.
   
5. Only use that account for the goal you’re saving for—keep an emergency fund separate.
6. Adjust your spending to live within what’s left after saving.

For example: If you know that you need to save $60,000  for tax bills in 18 months. You would take $60,000 and divide by 18 which means you need to save $3,333 per month. You then set up a periodical debit that goes into a separate account called "Tax Reserve Account". That way, when tax bills are due, the money’s already there and you’re not stressing about how to come up with it.    

Many of doctors get caught out by not doing this because they get (F.T.I.) disease. They fail to implement. They end up spending all the money and then have to deal with a never ending spiral of expensive ATO repayment plans.  

You can apply this same pay yourself first SYSTEM to saving for any goal by setting up multiple reserve accounts and get complete control of over your finances once and for all! 

This method helps you build good habits because you’re limiting what’s available to spend. Over time, your lifestyle naturally adapts to your new cash flow.  

For Bill and  Sue, we put this into practice with salary sacrifice to superannuation , accelerated mortgage repayments and a tax reserve account.  At first, it squeezed their budget, and they even had to use their offset account to make ends meet—which they didn't like . But that discomfort made them rethink their spending and start cutting back.

If you rely a lot on credit cards, this can be trickier, so we recommend getting rid of them completely and using a debit card. What's that I hear? You want to keep your credit cards so you can earn more points? The uncomfortable truth is that trying to get points on your credit card makes you spend more money than you otherwise would have because you end up paying for fancy upgrades. The Bottom line is this:  Rich people don't worry about points. They just use cold hard cash. Let that sink in.

Next Question...How Much Should You Save?

This really depends on your personal situation—your income, family, and goals all play a part. Most experts suggest saving at least 10% of your income, but we believe Doctors should be aiming for 15% (initially) of your income after business expeses  (before tax) and increasing that to 20% over time. 

The trick is setting goals and timelines,  making a plan, and keeping track of how you’re doing. That’s where working with a us can make a huge difference.

For our clients, we often recommend strategies like:

• Paying off your mortgage faster (think 10 years or less)
• Salary sacrificing more to superannuation
  
• Setting up investment plans via family trusts and investment companies into shares via ETF's.
• Using strategies like negative gearing to encourage disciplined cash flow management
  

Just remember, the best approach depends on your individual situation, so getting tailored advice is always the way to go.

So, bottom line: managing your money well takes planning and discipline, especially when you’re earning more. But with the right mindset and tools, you can avoid those nasty tax surprises, get your spending under control, and build a solid financial future.

Chris Tolevsky is a Specialist Medical Accountant with over 30 years experience in the medical and allied health fields.  He provides expert guidance on tax strategies, building and protecting wealth . If you’re interested in discussing how we can help you please book a complimentary consultation. 

Disclaimer: This article contains general information only . It is not designed to be a substitute for professional advice and does not take into account your individual circumstances, so please check with us before implementing this strategy to make sure it is suitable