We tend to make personal finance way more complicated than it needs to be. Pick up an investing book at the bookstore or attend a financial seminar and you know what I mean. All the financial lingo, tax codes, strategies….yada, yada, yada.
While understanding the lingo is important (to some degree), at the end of the day, achieving financial success depends upon setting financial goals and being able to put a plan in place to achieve those goals. A good zero-based budget (the budgeting process I like most and recommend) takes your household income and intentionally and thoughtfully assigns a dollar amount to every spending category before the pay period begins. The result should be a $0 balance because every dollar has been assigned to a spending category.
If you have done a budget before with some goal in mind that you would like to achieve (whether that be debt repayment, saving up for a vacation, etc.) you know well the frustrating feeling of wanting to make progress faster than is mathematically possible. At the end of the day, you can do one of two things to make your plan move forward faster. Increase your income or cut your expenses. It is simple as that.
Increasing income vs. cutting expenses
The financial community tends to focus almost exclusively on the option of cutting expenses since there is a lot of data to suggest that we as a country are out of control with our spending. This inherently then becomes the goal of the budget…figure out as many areas as you can cut to free up cash to put towards financial goals.
I would contend that figuring out the expenses side of the equation is the most important of the two and should be your primary focus. After all, if you can figure that out, any additional income will be maximized because it will be spent with purpose and within the boundaries that you have already set. On the other hand, you could earn $150,000 instead of $120,000 next year but because of a lack of discipline with managing that $120,000 and the bad habits that have been built (we all have them!), $150,000 may not provide much additional benefit after you consider the taxes that will be taken out. Rather, if you have been spending your $120,000 with purpose and direction and have goals and a budget in place, when you get that extra income, you know exactly where it should go. That is when you see real progress being made towards achieving a financial goal!
Why should pharmacists focus on maximizing their income?
While a pharmacist’s income is certainly nice (median of $121,500 in 2015 according to the Bureau of Labor Statistics), the purchasing power of a pharmacist’s income is declining in recent years because student debt loads and the interest rates associated with that debt is outpacing any salary increases. That is worth saying again. A pharmacist today has less ‘available income’ than a pharmacist 5 or so years ago because debt loads have gone up faster than salary increases (and continue to do so).
For example, 5 years ago, the median debt load upon graduation for a pharmacy student was $110,000 (Ref: AACP Graduating Student Survey, 2011) and the median pharmacist income was $113,390. At this point in time, the median income for a pharmacist exceeded the median debt load. Fast forward to 2015, where the median student debt load was $150,000 (Ref: AACP Graduating Student Survey, 2016) while the median salary for a pharmacist was $121,500.
Therefore, the median salary during that 5 year period (2011-2015) increased by $8,110 while the median debt load during that same period increased by $40,000. Ouch.
The other consideration, besides the apparent eroding purchasing power of the pharmacists income, is the reality that for many pharmacists, income starts out high coming out of school but maintains relatively even with inflation via cost-of-living adjustments and some minor pay raises over time. This will, of course, not be true for the minority of individuals that pursue a management position or other opportunity to grow income such as starting a new business. This flat trajectory of income for the majority is unique to our profession compared to other fields of work. This further highlights the importance of avoiding the temptation to live up to your income coming out of the gate as it can be difficult to adjust down from this over time because income may not increase significantly for a pharmacist yet his/her expectations for life and the expenses that come along with life over time will go up.
Why is that relevant? We can’t continue to lean on the pharmacist’s income as the sole factor for achieving financial success. Yes, it is important, and if managed wisely, should be more than enough. However, if this trend continues, the pharmacist (to maintain his/her purchasing power today), will need to either (1) further cut expenses, (2) hope for significant pay raises or (3) take action to generate more income.
Know the WHY
Before we talk about ideas for how you may earn extra income in part 2 of this blog series, it is important to address the WHY for earning additional income or else it will feel like spending a lot of time and spinning your wheels for not a whole lot of benefit. This takes us back to the importance of setting financial goals. If you know what you are trying to achieve (pay off debt by a certain date, build an emergency fund, put more towards retirement, pay off the house early, etc.) your extra work will have that much more motivation behind it.
Once you know the “why” for earning additional income, the next logical question would be ‘how do you practically earn additional income?’
There are two major ways to think about earning extra income. You can focus on earning “active income” where you trade your time for money or you could focus on “passive income” where there is an uneven distribution between your time and earning money (hopefully less time for more money but not always the case). We will take a closer look at both of these categories with specific examples and ideas so stay tuned…you won’t want to miss it!
Your Financial Homework
Before reading part 2 of this blog-series, I want you to make a commitment to earn an extra $1000 (net income after taxes) this coming year to help jumpstart progress towards a financial goal you are working on.
You might be thinking ‘how much impact can $1,000 really have?’
- If you were to invest $1000 today in a Roth IRA and the money were to earn 8% growth over the next 40 years, that $1,000 would turn into almost $25,000 tax-free!
- Or how about paying off debt? If we assumed that you had $100,000 in student loan debt remaining at 6% interest (under the 10 year repayment plan) and you were able to throw $83 extra per month ($1000 per year) above and beyond your principal starting this year and continuing here on (because we will keep the momentum going!) you will save over $3000 in paying interest and have the loan paid off almost 1 year earlier.
- What about college savings? Maybe you are debt free with a good emergency fund in place and on your way to saving for retirement so you want to start a college fund for your child. If you were to start saving $83/month for a newborn from now until they go to college in a tax-free growth account (such as a 529 plan), you would have almost $40,000 saved to pay in cash for college.
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