We often refer to retirement as if it were a mystical date in the future, out of our control and that may or may not become reality. I’m guilty of this myself. The reality is that saving for the future is not a mystery. It is simply setting a goal and putting a plan in place to achieve that goal.
Those that win financially in the long run can visualize the future and act today, despite having competing financial responsibilities. They can get rid of debt, cut expenses and/or earn additional income to free up cash each month to save for the future. It should be no surprise that those living paycheck to paycheck will fall short of achieving their long-term financial goals. While living paycheck to paycheck is a reality for many people in this country, I am assuming most reading this article have (or will have) a pharmacist salary Therefore, with few exceptions, there is no excuse for a pharmacist to be living paycheck to paycheck. Whether living paycheck to paycheck is a result of too much debt or having an expensive lifestyle, something has to give if you want to be successful in achieving your long-term savings goals.
While the method to achieve a long-term savings goal is pretty straightforward, the reality is that it takes hard work and sacrifice to get there. This is simply a choice and if you want it, you can have it.
Reasons to Build Wealth
So why focus on building wealth anyways? There are five main reasons that motivate Jess and I to stay debt free, develop a plan for how money is spent each month and save consistently for retirement at the expense of spending today.
#1 – Having a secure financial future for our family.
#2 – To be in a position to give away money in a way we have never been able to do so before.
#3 – To leave an inheritance to our family that will have an impact for generations to come. Compounding growth is an amazing phenomenon…$3 million dollars left to the next generation can easily become $30 million dollars or more for the generation that follows.
#4 – To teach our boys how to work hard and that if you set a goal and work towards it, you can achieve it.
#5 – Getting to the point of having the flexibility to do what we want, when we want rather than working out of necessity. Don’t take this the wrong way. I love the work that I do. However, I think many (including myself) would prefer to be in a position to choose what work we do when we do it. That may mean doing the same exact thing as I am doing now but the difference is having the independence to make that decision beyond any salary influences.
Balancing Frugality and Spending
Am I suggesting that you should cut your lifestyle to a degree that you aren’t having any fun on a day-to-day basis for the sake of achieving your long-term savings goal? If you have lots of high interest rate debt then, yes, I am suggesting that. The reality is the longer that high interest rate debt lives on, the longer you delay working towards achieving other financial goals. Otherwise, I think we can all agree there is a balance to find between enjoying our blessings today and planning for the future. We tend to hear this debate (“save save save” vs. “enjoy life while you can”) from the extremes and the reality is that the truth lies somewhere in the middle.
Let me walk through an example budget that shows barring any significant financial hardships, any pharmacist (with thoughtful planning) should be able to enjoy their income today while adequately planning for the future. For this example, let’s assume this pharmacist is making the national average ($121,500 according to 2015 Bureau of Labor Statistics) and recently graduated from pharmacy school with $150,000 in student loans (median from the class of 2015) at 6% interest. Assuming a 35% income tax rate for federal and state taxes combined, this pharmacist would have a take-home pay of $6,581 per month ($121,500 / 12 months * 65%).
Example pharmacist monthly expenses
|Category||Amount||% Of Income|
|Giving (e.g., church, organization, etc.)||$658||(10%)|
|Mortgage (or rent) with property taxes and home owners insurance*||$1,400||(21%)|
|Utilities (e.g., water, sewer, trash, electricity, gas, cell phone)||$500||(8%)|
|Student loan payment#||$1,665||(25%)|
|Discretionary income (e.g., eating out, entertainment, hair cuts, clothing, etc.)||$332||(5%)|
* Represents approximately $220,000 home with a 30 year mortgage at 4% interest with approximately $4,000 per year in property taxes
# If opting in to the 10-year standard repayment plan, he/she would have a monthly payment of $1,665 (ouch!).
^ Assumes purchasing (1) used car valued at approximately $10,000 every 6 years; (2) $200 gas; and (3) $100 car insurance per month
Not too bad to have $332 of discretionary income per month while giving 10%, saving 15% for retirement and owning a $220,000 home. This also assumes no employer retirement match and if married, no income from a working spouse. Assuming no changes in salary, saving 15% per month ($987) over one’s career (40 years) at 6% growth results in almost $2 million.
So what happens to the above example when you get out of student loan debt? Amazing things happen when you free up over $1,600 per month. More giving, more retirement savings, more travel, paying off the mortgage early, saving for kids college, etc.
Barriers to Achieving Long-Term Savings Goals
While there are many barriers that can get in the way of achieving your long-term savings goal, there are four that seem to derail progress more so than the others:
#1 – High interest rate debt. The monthly payment, psychological burden and accruing interest can really put a damper in making progress towards your other goals.
#2 – An expensive lifestyle. This is a no brainer but the hardest one for all of us to address. If you haven’t yet, please consider reading The Millionaire Next Door by Tom Stanley, PhD. This is a great read emphasizing the characteristics and behaviors of those that succeed in achieving their long-term financial goals. Do you have areas that you could cut further in your monthly budget?
#3 – Lacking a plan (aka budget). You can see by the example above, it is easy to have the feeling of living paycheck to paycheck until you put numbers on to paper and have a plan to follow each month. For Jess and I, this was the ‘secret’ of freeing up over $2,000 per month of our take home pay to expedite paying off our student loan debt.
#4 – Car payments. Most vehicles are depreciating assets that get in the way of making progress on building up appreciating assets. Do you own a million dollar car?
Your Financial Homework: Step #1 is to put to paper how much you need to have saved at what age to achieve your long-term savings goals? Then, figure out what percentage of your income you need to save each month to achieve that goal. If your monthly budget doesn’t currently allow that to happen, go back and evaluate changes you can make to free up some cash. In my opinion, focusing hard on long-term savings should only be the case once you have abolished high interest rate debt (e.g., student loans >6% and credit cards).