One of the most common questions I get asked is ‘how do I balance all of these financial priorities at the same time?’
This is a valid question. After all, many pharmacists are dealing with several competing priorities and the stress of trying to balance them all is overwhelming. These priorities include paying off debt (whether that be student loans, car payments, and/or credit cards), trying to build an emergency fund, and saving for retirement. Oh yeah, don’t forget about your day to day expenses such as paying your rent/mortgage, the utilities, life insurance, groceries, healthcare bills, automobile gas/insurance, clothing, and having some fun every once in a while…You get the point. There is a lot going on at once. Where do you start?
You may be asking yourself should I try to do all of these at once? Should I invest while paying down debt? Is it OK to buy a home (if not already done) now or should I wait until my debt is paid off? And what about giving? How can I do that while in debt and/or trying to achieve other goals?
If you have been following this blog, you have heard from some awesome pharmacists (including Drs. Kevin & Erin Fuschetto and Dr. Garlock) that made incredible financial progress at such a young age. Both of their stories highlight the power of having a plan in place!
As I look back on the journey Jess and I took to pay off $200,000 in debt, trying to do too many things at once was the biggest obstacle in our path to financial freedom. Shortly after I finished residency, we had well beyond six-figures in student loan debt, a mortgage, and two car payments. All the while, we were feeling the pressure to save for retirement, update our house and begin saving for our kids education. Sound familiar? I can remember feeling pulled to want to pay extra on the student loans and at other times save more for retirement, update the house and pay off the cars. We were making progress, but it was way too slow and we certainly felt like we couldn’t get ahead.
Something had to change.
While there are many good resources out there on managing money, I find most of them are lacking in having a tangible, stepwise approach that one can take to walk this journey and balance all of these competing priorities. I have read a handful of good financial books (most recently Tony Robbins Money Master the Game) and while I often find myself enamored with the content, two weeks later I couldn’t tell you much in terms of action steps that I should be implementing as a result of reading that book.
So are there any models out there that take you through a stepwise approach to managing your money?
Yes, there are two that are very similar (below) in their approach. What I love about them is that they are easy to follow, will help to simplify your financial plan, and allow you to feel like you are making some progress!
If you haven’t heard of either of these plans, you are probably taken aback since they are countercultural to what many are doing. For example, both models suggest waiting to buy a home until all non-mortgage debt is paid off and an emergency fund is in place. For many pharmacists coming out of school and ready to move on with life, that is a painful thought but one that should be considered in great detail before dismissing it. Think about it for a moment. If you get into a house before having a good down payment and taking care of other building blocks, you are putting yourself at risk. As I noted in my article, My Top 10 Financial Mistakes, the downside of getting into a house without a good down payment in place is subjecting yourself to private mortgage insurance (usually), buying a house that is beyond your means and having very little equity in the home which could put you at risk if the market were to shift downward and/or you needed or wanted to move in a short period of time before you had equity built up in the home.
The other, often shocking, part of these two models is not saving for retirement until step 4. Remember, this is all about getting momentum and trying to save 10-15% of your income for retirement while paying off $100,000 in student loans will certainly slow the feeling of progress on debt repayment. I’m OK with taking the employer match while paying off debt but certainly agree with nothing beyond that while paying off any debt that has an interest rate above 4%?
Why 4%? While the average rate of return in the stock market has been above 10% over the last 50+ years, comparing investing to debt repayment in that way would assume you are investing 100% in stocks which is often not the case. Therefore, when you assume a lower rate of return because of a diversified portfolio, investment fees (fund fees and advisor fees) and inflation, it is hard to justify saving (which has risks and unknowns) versus debt repayment (which is known) when you have loans with interest rates beyond 4%.
In the Ramsey Baby Steps, steps 4, 5 and 6 happen simultaneously whereas 1-3 happens in sequential order. Therefore, once you have 15% saved in retirement, you move on to step 5 (saving for kids college; if applicable) and then step 6 (paying off the home early). Once 5 and 6 are accomplished, then it is time to increase retirement savings beyond 15% and start giving like crazy.
In both models, there is a theme of giving throughout all the steps, even while in debt. While both of these models come from a biblical perspective of giving, I think giving is important for all to consider since it puts things into perspective, regardless of your religious beliefs. Giving a certain percentage of the income before spending on ourselves allows us to realize we have much more than we ever need and there are others that certainly could use help. It can build a heart of thankfulness and gratitude.
I understand both of these models are built on the foundation of managing money from a biblical perspective, but religion aside, these steps make a lot of sense. Want to make a tweak here or there based on your own philosophy? So be it, but pick a path and stick to it. You will see tremendous progress by having a laser focus like both of these plans suggest.
Your Financial Homework: Do you already have a stepwise approach to managing your financial plan? If not, consider picking one of the above and getting started! You can read all the financial books and magazines in the world, but without a stepwise approach to follow that is measurable, you will likely make very little progress. Once you decide on a model, make it a part of your budget! For example, if you start at Step 1 to save $1,000 in an emergency fund and want to have this done in 3 months, put the emergency fund (at $333/month) as a line item in the budget.