Types of Budgets

Budgeting in Private Practice is not something that you get taught. There are so many different methods of budgeting, in addition to the many different applications that are marketed to the budgeting curious. It can be very confusing to navigate all of this, and sometimes you just need to break them down into a few categories. If you use YNAB and looking forward to budgeting in your private practice, you’ll recognize what catagory YNAB falls into. 

Zero Based Budget

This is the method most often used in private practice budgeting. You take your goals, expenses, and estimates for taxes and set aside that money. What you get paid is all the total money you make minute these expenses and goals. This sort of method requires you to pay attention to your expense categories and make sure you don’t accidentally skirt over the goal you set. This is a budget first and figure out what money you spent later sort of budgeting.  

Pay Yourself First

This type of budgeting works exactly as you thought it would. After you determine your expense and figure out how much you can pay yourself. Then, every month thereafter, you pay yourself. This takes a less involved approach, as it doesn’t go into the categories of expenses that zero-based budgeting does. You usually take a predetermined amount of money for the month, whether it’s in a percentage of total income or an amount of a fee per session. Everything else gets used for savings, taxes, and expenses. 

Envelope Budgeting

This is a flexible system that allows you to organize the money you have. The key to the envelopes is that you can only organize the money that you have. The way this would work is at regular intervals you would spill your income into different expense, savings, and payroll categories. So if you’re keeping 50% of the income for your practice, every time you get paid half of that gets sent to another envelope.

Envelopes could be literal envelopes of cash (or monopoly money as a representation). Other options could be different bank accounts as Profit First recommends. You can also use an application that helps you sort the money you have into envelopes with one bank account. YNAB is an envelope system, that allows you to put your money in different categories (envelopes) and only the money that you currently have. 

Budgeting in Private Practice

New Private Practice Budgeting

Now that you know what kind of budget you might want to use, it’s important to set up some systems to help you succeed. 

Separate Accounts

I’m not a lawyer or an accountant, so this is not official advice for such. BUT From an organizational standpoint, it makes so much sense that you have a separate checking account for your private practice. There are probably systems that help you sort through that, and even in YNAB it might be possible to do it, but it is very easy to make a mistake and mess things up. So keeping a separate account with a separate budget will go a long way in a few months when it’s time for quarterly taxes. And when it’s time to pay yourself. When you do ask an account and lawyer, they will probably recommend you have a separate account for other reasons. 

Starting Money

If you are starting out in your private practice, you’ll need some money to start for your smaller expenses. Think of things like your online listing profile, a simple website, and an EHR. It’s best to start small and invest as much of what you earn in the practice as possible, rather than continually giving your business money from your personal account. Though you will likely be able to write it off (still not an accountant) it keeps you in the negative, as opposed to being budget neutral. Whatever system you end up putting into place, do what you can to be self-sustaining to start. This might mean taking a few sliding scale clients and using that money to feed back into your expenses categories. Though from a paying yourself perspective this is not a helpful idea and can create a mindset of skipping paying yourself.  

Tracking your Income and Expenses

There are tons of systems out there to track your income and expenses, and depending on your caseload and income depend on what you decide to use. 

Google or Excel Sheets

This is a simple and classic method to use, and a quick internet search will reveal many templates that you can use to track your expenses and income. Depending on your EHR, you can also download your income for the month broken down by day, week, or clients. This would certainly help you import the information into your sheet. All you would need is a few formulas and let the sheet do the work! There are some cons to this, however. 

Paper Ledger

Call me old-fashioned, but nothing beats pen and paper sometimes. Especially if you keep things really simple in your practice. Upsides include it being internet safe, with the downside of being at risk to any a number of disasters that can happen in your office (leaky ceiling your landlord won’t fix). You might also give your accountant a heart attack if you show up with a bunch of papers come tax season too, rather than something electronically to use. 

Internet or Computer Based Applications

There are so many different internet-based apps, and you’re here because of one of them (more on that later). Sometimes they come bundled with the accounting software that you use to manage your own expenses. Maybe your seeking out a new budgeting software because you don’t have one yet. It’s important to look at each one individually, as they work similarly to the previously mentioned budgeting styles. The only downside to this is that you can’t change how the system works. So you are stuck either liking it (or at least dealing with it) or you might find yourself exploring new options. Like using YNAB for your Private Practice

Keep Your Receipts

This is another one of those things where you might scare your accountant if you don’t do. Keeping receipts is amazingly helpful especially when tracking your expenses. Why? Well, monthly you can take a peak at your receipts and make sure that they line up with what your monthly bank statement says. Do they match? Hopefully so. If not, you might have to look back and see where something went wrong. This is a good failsafe to make sure the books are balanced.

There’s also a matter of Audits from the IRS. The IRS indicates that they can back up to three years on their initial audit, and request more if they find a substantial discrepancy. They can go back further too if it’s needed. So, not only will you need your expenses and income reports, but also need all of the receipts & transactions. Scary, huh? This is why staying organized is key. 

Paying Yourself

Where you are in life also depends on how you go about this. If you are starting as a side hustle then you can probably get away with just feeding more money into your expenses. However, if you decided to quit your community practice where you are overworked and underpaid, this isn’t going to work for you. 

Depending on your budgeting system might depend on how you go about this too. In the beginning, you might need to take a nominal rate from your sessions, like $40 or $50 per session, rather than paying yourself an overall 50%. This can help manage your overhead and still give you some money to pay yourself with. As you continue to build your income and get more clients, you might be able to switch over to another form of paying yourself, such as Profit First style. 

You Need A Budget?

Yes, you do. The first rule of YNAB is to tell everyone about YNAB, at least that’s what my t-shirt says. 

In all seriousness, You Need A Budget is a budgeting app that falls into the ‘envelope system’ category. If you have ever listened to Jesse Mecham, the founder/creator of YNAB, talk about its origins, you’ll know it started as an excel sheet and grew into a cult following. It’s earned its following, though this is someone within the cult following. 

4 Rules of YNAB

YNAB’s foundation is based on the 4 rules. These rules are 

1. Give Every Dollar A Job: This means that whenever you get money, you assign it to a category (re: envelope) in the budget app. This you telling the money that it will be spent on that specific category. This could be your online profile, EHR, or networking coffee. 
2. Embrace Your True Expenses: These are your big, infrequent expenses. Think website hosting and WordPress applications, annual licensure renewal fees, or the CEs you always wait until August to worry about. The idea is that you set aside some money ahead of time so that when the time comes you already have (at least some of) the money available. 
3. Roll With The Punches: Things happen. Computers break, surprise business expenses and repairs (that darn leaky ceiling), or you spent a little extra at the conference than you thought you would. This rule helps you go with the flow and encourages you to re-assign money for the job of covering the expense.  This can come from other envelopes if needed, but ideally, it comes from the income you have yet to sort. 
4. Age Your Money: Imagine your money comes into your bank account in envelopes, and its labeled the day it is deposited. Rule 4 hopes that the money you spend is dated from last month, at the minimum. So the money you earned on August 1st sits in your bank account and is ideally spent on or after September 1st. The age of your money would be about 31 days then. Why is this important? That means that you are spending less than you are making, and you have the flexibility should everything fall apart. Like the irrational fear that all of your clients leave your practice at the same time. You’ll have 31 days worth of money sitting in your bank account that can be given new jobs at any moment. This naturally occurs when you follow rules 1 and 2, or if you are making more money than your budget requires. 

Some addition information that might be helpful if you are new to YNAB

• Ready To Be Assigned: This is a spot in your YNAB application where your money sits before it is given a job. These are the cornerstone of YNAB and are supposed to guide the user through the software and manage the expenses that come up. 
• Category Groups & Catagories: Catagory groups hold individual categories, which is where you assign your money. The groups could be things like website subscriptions, and underneath you have your host subscription, website design plugins, SEO plugins

There are infinite insights, tips, and tricks to YNAB, but these are the most important for this article. 

Using YNAB in Private Practice

Using YNAB in your Private Practice is not going to be too much different than a personal budget. Nothing changes and you still need to follow the 4 rules. 

Rule 1: Give Every Dollar a Job

Even the money you earn works for you in private practice. Depending on how you decide to pay yourself depends on how you sort the money around. But regardless, when you charge your clients that money has the job of covering your expenses, being spent on quarterly and yearly taxes, and paying yourself. Make sure you figure out what you want to pay yourself, and set aside expenses, and taxes. When your money ends up in the To Be Budgeted, you’ll need to sort it based on those predetermined numbers

Rule 2: Embrace Your True Expenses

You know precisely what these are. Therapy Profiles so your clients can find you. A website everyone says is mandatory but you still aren’t sure why you need it. That darn EHR just went up 35% in price. This doesn’t include license and association fees, self employment taxes, or anything that expensive board certification you need to get CEs for. You need to set aside some money so that when the time comes, because these expenses don’t put such a hole in your bank account. 

Rule 3: Roll with the Punches

Sometimes you just need to go with the flow. It’s great advice we give our clients, but super difficult to take sometimes. Like that time your lawyer tells you that you need to refile your business as a PLLC. That’s another chunk of change gone from the budget. This is when you have to reassign jobs for money to do this job now. Like telling the intern to forget what you just assigned them because you have more important things now. 

Rule 4: Age Your Money

This rule means that you have enough money in the bank account for at least 30 days worth of your expenses. The client you charged at the beginning of August for a session gets deposited into your bank account on the 5th. If you are able to follow this rule, then you wouldn’t spend that money until September 5th. This makes the age of your money 31 days. If you follow the other rules, you should be able to achieve this without issue, and keeps you free of cash flow issues. 

Tips For Using YNAB in Private Practice

Paying Yourself as an Expense

Paying yourself is a business expense, and it needs to be framed that way. I’ll say it louder for the people in the back: Payroll is a business expense.  That means it needs to fall under rule 2, which means it needs to be dealt with every month (or quarter depending on how you pay yourself). If you have other clinicians, you can create a whole payroll category group, and list each of your clinicians underneath it. When you treat is as an expense, rather than something that you’ll get to eventually (or use it to cover business expenses instead) you’ll be able to pay yourself consistently.  

Practice Income as a Payee

When money comes into YNAB, you need to label who is paying you. Don’t put your client’s names there, because as far as I can tell, YNAB is not HIPAA compliant nor do you have a Bussiness Associate Agreement. So instead, Label it “Therapy Clients” or “Outpatient Groups”. If you want to get fancy, you can organize it by service type to see what makes you more money. This would take some work on your part, downloading sheets from your EHR to see what services times made what certain amount of money weekly, but might be worth it if you want to track it. 

The Money Sorter: YNAB Private Practice Hack

One thing I came up with I call the Money Sorter. After my money enters the To Be Assigned I split it based on my pay percentages. This is held in the Money Sorter category group. The four categories are Owners Pay, Profit, Expenses, and Taxes. From there, I move the money as needed to cover their assigned task, paying for profiles, paying myself, or those darn quarterly taxes. 

Getting Started in YNAB for Private Practice

Whether you are new to YNAB and struggling in your private practice to gain control of your money or an experienced Wine Hamburger, Download your YNAB Tips Sheet today to implement YNAB into your Private Practice. It’s at the top of the page.

If you are looking for some 1:1 or Group Coaching, then Learn More About Budget Coaching with the Private Practice Budget Academy.