Transitioning from student to new practitioner can be both exciting and overwhelming. For many, this transition period and the joy of finally being done with school is met with the frustration of having six-figure debt and several competing financial priorities. Which student loan repayment option should I choose? When should I start saving for retirement? Do I need a financial advisor? What about an emergency fund? Should I buy a house? These are just a few of the common questions I receive on a regular basis from students moving into new practitioner life.
With so many competing priorities, where do you start? New graduates should start by building a strong financial foundation for which the rest of their financial plan can be built.
I was recently reading The Three Little Pigs to my three boys and couldn’t help but think of the similarity between that story and building a strong financial foundation. Depending on which version you read, the classic story goes something like this: “Once upon a time there were three little pigs. One pig built a house of straw while a second pig built his house with sticks. They built their houses very quickly and then sang and danced all day because they were lazy. The third little pig worked hard all day and built his house with bricks …”
As a student pharmacist facing some of the most important financial decisions you will make in the next 10 years, it is important to plan ahead to ensure you are building a financial foundation made of bricks. Here are five essentials to get you started.
Setting goals should be the first step in building a strong foundation. It is important to know where you want to go before you set out on a course of action. Just like you encourage patients to develop specific and measurable time-oriented goals, you have to do the same with your finances. Instead of having nebulous financial goals (e.g., paying off student loans), you should create specific, measurable, and time-oriented goals that will help you to reach that goal.
For example, one step toward paying off student loans could be the following: “By July 1, 2017, I will meet with the financial aid officer at my college/school to ensure I am up to date on my student loan balance and have an understanding of my repayment options.”
Visit www.yourfinancialpharmacist.com/tools to download the Goal Setting Worksheet. If you are in a relationship where your finances are merged with someone else, make sure to do Essential #1 and Essential #2 together.
Budgeting isn’t fun by any stretch of the imagination and certainly comes easier to some than others. The budget was the hardest and most important piece of the puzzle for my wife and I when we were paying off $200,000 of non-mortgage debt.
I am a firm believer that everyone should have a budget. Why? A budget is the implementation plan for your financial goals and puts purpose to your spending. After writing down your financial goals, go to www. yourfinancialpharmacist.com/tools to download the Budgeting Worksheet for guidance on a seven-step process to create your first budget.
As you know all too well, pharmacy school graduates are facing unprecedented amounts of student debt. According to the American Association of Colleges of Pharmacy Graduating Student Survey, the class of 2016 had a median debt load of $150,000. This figure was only $100,000 in 2009.Rising student debt puts a barrier on a pharmacist graduate to achieve other financial goals (e.g., saving for retirement, buying a home, etc.). Therefore, creating a debt repayment plan is essential to building a strong financial foundation.
There are two key steps to making sure your debt doesn’t get in the way of being successful with the rest of your financial plan. First, determine a pay-off date. Look at the total amount of debt you have, your projected household income, and set a pay-off date that is reasonable yet challenging. Second, figure out how much money per month you will need to pay toward that debt and make a commitment to build that into your monthly budget.
I want to convince you that you can pay off your student loans faster than you may think. Let’s assume you are a new pharmacist graduate making $121,500 (median income 2015; Bureau of Labor Statistics). After paying state/federal income taxes, FICA, and health care premiums, you would have a take home pay of approximately $78,975 ($6,581 per month). If you could live off of $40,000 per year (which is reasonable with a scaled back lifestyle), there would be $38,975 available to throw at your student loan debt. If you had $150,000 in student loan debt, you could pay that debt off within approximately 4 years. Imagine that: not even 4 years out from pharmacy school without a penny of debt and a six-figure income. Talk about financial freedom!
If you need some extra motivation here, use a student loan repayment calculator to see how much you will save by paying off a loan in a shorter period of time than you originally anticipated. For example, if you were to have $150,000 in debt at 6% interest and decide to pay this off over 5 years instead of 10 years, you would save more than $25,000 in interest paid! If you are overwhelmed with the student loan repayment options, visit www.yourfinancialpharmacist.com/tools for a summary overview of the options available to you.
An emergency fund gives you peace of mind that an unexpected expense isn’t going to blow up and derail the rest of your financial plan. Specifically, it gives you peace of mind knowing you won’t have to borrow from retirement or take on additional debt to cover this expense. According to the 2015 Bankrate Consumer Survey, 30 million Americans (13%) tapped into retirement savings to cover an unexpected expense (aka, an “emergency”).
A good rule of thumb is saving up 3 to 6 months of expenses in a place that is readily accessible (and separate from your checking account) such as a simple savings account or money market savings account. Don’t get too excited about how much interest you will earn with this account. The goal here is just security and protecting your financial plan.
As a student, it may be unrealistic for you to save up 3 to 6 months’ worth of expenses while in school. Therefore, focus on getting a small fund started (e.g., $500 to $1,000) to avoid having to take on any additional debt in the event of an emergency. Then, once you have finished school and/or residency, make a plan to complete your emergency fund.
Entire books have been written on this topic, so the intent of Essential #5 is not to be your go-to insurance guide but rather to get you thinking more about this topic. I recommend you keep this information in the back of your mind and when the timing is right, work with a reputable financial advisor to help you navigate what insurance options are necessary and which policies are best for you.
Similar to an emergency fund, proper insurance coverage is meant to help you protect the rest of your financial plan. While some insurance coverage will be required by law (e.g., auto and health) and others by the lender (e.g., homeowner’s insurance), there are several policies you should consider further to help protect the most valuable asset you have: your income.
Two policies to specifically evaluate are term-life and disability insurance. Both of these policies are intended to help supplement your income in the event that you were to die (life insurance) or become disabled and unable to perform your job duties (disability insurance). If your family depends on your income after graduation, then you should strongly consider purchasing a good life and disability insurance policy. You will likely have some basic coverage through your employer, but more often than not, that coverage will be insufficient.
Achieving a solid financial foundation requires that you take action on these five steps. I challenge you to do so by filling out the table on this page to determine a goal date for completion and action steps you need to take to finish each foundation step. You can do it!