My October article for the Ohio Pharmacists Association New Practitioner eXperience (NPX) Newsletter was all about financial statistics that will motivate you to take action. While I’m generally not a big fan of motivation by fear, these statistics (if true for you), should get you fired up about taking action. You will see that a large chunk of the US population is struggling with personal finances. It is time to be on the right side of these statistics!
Here’s an excerpt from that article:
Statistic #1: Saving for a Rainy Day
47% of Americans could not cover an emergency expense costing $400 without having to sell something or borrow money. (Reference: Federal Reserve Report on the Economic Well-Being of US Households, May 2015)
The reality is that the unpredictable will happen. The question is…are you ready for when that day comes?
I’m not going to lie. I wasn’t sold on the importance of an emergency fund back in 2009 after finishing residency training. Looking back, I think I was a bit arrogant in thinking emergencies wouldn’t happen or that I would somehow ‘figure it out.’ When $200,000 in non-mortgage debt is staring you in the face, it is hard to buy into the need to save up 3-6 months of expenses for when a rainy day might rear its ugly head. The reality is that an emergency will rear its ugly head; it’s just a matter of when.
Building an emergency fund seemed BORING to me; especially when you compare it to investing or getting out of debt. While yes, it can be boring, let me assure you that building a successful financial future depends on having a good emergency fund in place.
Why does having an emergency fund matter? It gives you peace of mind that an emergency resulting in a significant 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 “emergency”). Certainly not ideal considering that in most cases, this comes with taxes and a penalty for early-withdrawals.
What should an emergency fund look like? A good rule of thumb is saving up 3-6 months of expenses (not income) in a place that is readily accessible (and separate from your other account where expenses are made) such as a simple savings account or money market savings account.
Don’t get too excited about the annual percentage yield (aka how much interest you will earn per year) on a simple savings or money market account. A quick search online at the time of this post showed savings accounts having rates hovering around 1% and money market savings accounts around 0.75-1%. If you are looking for an account, you can go to Bankrate to search for the best rates. You should also check with the bank you are already using to see if their rates are competitive. Save any excitement for returns to your retirement savings. The goal here is just security and protecting your financial plan.
Taking Action on Statistic #1: If you don’t have an emergency fund in place, consider making this a budget item to pay yourself first rather than trying to scrape up what is left when the month is over. Obviously you want to build this up as fast as you possibly can but if you are several thousand dollars off, determine what that difference is and make a plan to save some each month over the next year or two to catch-up. For example, if you determine that you need $15,000 in your emergency fund and have only $1,000 saved to date, take the difference and divide it by 12 months to achieve this goal in the next year. The result would be saving $1,167 per month for 12 months to have a fully funded emergency fund.
Statistic #2: Retirement Savings
One-third of Americans report they have no retirement savings and 23 percent report having less than $10,000 saved. (Reference: GOBankingRates 2016 Retirement Survey)
This statistic scares me. Albert Einstein is famous for saying “Compounding interest is the eighth wonder of the world. He who understands it, earns it…he who doesn’t…pays it.” The most important factor when saving for retirement is time. Time to allow for that compounding growth to work its magic. The longer you wait to save for retirement, the more you need to save to reach that goal.
Let’s look at two pharmacists, Joe and Jonny who are both 24 years old, fresh out of a 0-6-year Doctor of Pharmacy program with aspirations to retire at age 60. Joe is able to put away $1,500 per month towards retirement starting at the age of 24 all the way until age 40. For this example, let’s assume there are no employer contributions (aka ‘match’) for retirement savings. At age 40, Joe hits a snag with other competing financial priorities and stops saving for retirement all together. Unfortunately he isn’t able to save any more money towards retirement for the rest of his career.
On the other hand, Jonny isn’t able to save anything coming out of school for retirement as he is strapped with debt and has purchased a new home and car that are using up much of his monthly income. At the age of 40, Jonny decides he better start getting serious about saving for retirement and puts away $3,000 per month until the age of 60.
Assuming an average of 8% growth per year in investments, at the age of 60, Joe would have $2.8 million saved in comparison to Jonny’s $1.7 million. Joe has over $1 million more than Jonny despite Jonny investing a total of $720,000 and Joe investing a total of $288,000. That is the power of compounding growth and starting early!
Considering the audience of this newsletter is new practitioners, it is important to consider how millennials are doing with retirement savings. According to a 2016 survey, 36% of millennials ages 25 to 34 have no retirement savings at all. I would venture to believe this might be even higher for pharmacists who are facing unprecedented amounts of student loan debt. The average amount borrowed for a student graduating from pharmacy school in 2016 was $157,425. There is no question that student loan debt can be a significant barrier to retirement savings.
Taking Action on Statistic #2: Are you in a position to save for retirement? Have you weighed the pros/cons of paying off your debt versus saving for retirement? Are you taking advantage of any match (aka free dollars) offered by your employer? If saving for retirement is the right priority for you, are you making retirement savings an automatic withdrawal to pay yourself first?
Read the final statistic here and then send me your comments or thoughts via Twitter (@FinancialRPh), Facebook (www.facebook.com/yourfinancialpharmacist) or e-mail at email@example.com