Over the past week, three new graduates reached out to me with $230,000, $240,000 and $300,000 of student loan debt, respectively.
Assuming an average interest rate of 6% and a 10-year repayment plan, the payment due on this type of debt would be $2500 – $3300 per month.
As a point of reference, that monthly payment is more than a mortgage payment on a $500,000 house with 4% interest and a 30-year repayment plan.
All three of these new graduates used words like overwhelmed, drowning, guilty, and confused to describe their situation. I could sense a feeling of anxiety and hopelessness in their communication despite making a six-figure income or being on their way to do so after residency training.
When I heard from these pharmacists, it resonated with my own personal situation where I found myself with $200,000 of non-mortgage debt, making payments of more than $2000 per month and seeing my balance inch downwards in a way that felt like it would never be gone.
So, if you find yourself in mounds of student loan debt, where should you start?
Would it be best to begin with the emergency fund? How about refinancing the loans? What about retirement? Is buying a home going to be possible? If so, when? What about planning a wedding or preparing for the expenses of children?
You get the point. It quickly becomes overwhelming.
For those that are resonating with this feeling of being overwhelmed and in part feeling hopeless, let this post reassure you that (1) you are not alone and (2) being aware of this feeling is the first step in turning the ship around.
The easy thing to do is to get overwhelmed with feeling like you need to do everything at once. I can assure you that the result will more likely than not be spinning your wheels and getting frustrated.
It’s time to do something different.
Your Financial Homework
I want you to make a commitment to get ONE SMALL WIN before the month is over that will help get some momentum moving in the right direction.
Here are some SMALL WIN IDEAS to get you started:
Read one personal finance book;
Put together a budget;
Give yourself direction by setting financial goals;
Save $100 towards an emergency fund;
Send me an e-mail at [email protected] with a question that has been on your mind and is causing you stress;
Buy a term-life insurance policy to make sure your family is protected in the event of your death;
Get rid of a credit card that is plaguing you.
Once you identify and achieve your ONE SMALL WIN, drop a note in the comments section below summarizing what you achieved.
Remember, you are not alone and sharing your ONE SMALL WIN may encourage another pharmacist to do the same.
In Part 1 of this blog series (Don’t Forget About the Income Side of the Equation), I wrote about (1) why pharmacists should look at opportunities to maximize their income and (2) the importance of knowing the WHY for wanting to do so.
There are many ways for pharmacists to make extra money. The two main categories to get you thinking about earning some additional income; active and passive income. Let’s take a further look at both and some side jobs for pharmacists.
Active Income
With active income, you are trading your time and your skill for money. For most of us, this is what we do every day. We get paid a salary or hourly rate to perform our functions as a pharmacist. Thankfully, for pharmacists, where the median salary is $58/hour, it is a GREAT profession to have the option of trading time for money. As you know, not every profession has the luxury of picking up an extra day’s work for $500 of pre-tax income.
Therefore, the most common and obvious option for pharmacists looking to earn some additional income is to pick up extra shifts with their employer. As you will see with the passive income streams I mention later in this article (which may look more attractive in the long run), this strategy of working extra hours in return for income is likely the fastest way to earn additional income without investing a bunch of time, energy and money to getting something off the ground (such as a book, blog, side business, etc.).
If there are no extra shifts available from your current employer, you could explore PRN staffing opportunities at another employer such as a hospital, community pharmacy, pharmacy benefit manager, mail order pharmacy, or long-tern care consulting company to name a few. Use your network of pharmacy friends to identify companies that have staffing needs!
Other options for earning active income could be starting a consulting business where you can provide your expertise to organizations and businesses that need assistance without hiring a full time employee. For example, maybe you are a clinical specialist that has developed a transitions of care clinic within a large academic medical center and a community hospital near by is interested in doing the same thing. You could set up a limited liability company (LLC), determine an hourly rate for your services and start leveraging your expertise.
Instead of a clinical specialist in a hospital, maybe you are a community pharmacist with 10 years of experience developing and running MTM programs. Could you consult with other pharmacies (probably best to do so outside the area you are working that would be considered competition) to help them establish their own MTM program? Similar to the example above, you could establish an LLC and market your services to pharmacies looking to implement similar services.
It is a good time to mention that with all work you are doing outside of the scope of your day job, you should be very clear on the policies and procedures your employer has on you doing such work to make sure there are no conflicts of interest. After all, if you lose your current job because you are spending time outside work building a consulting business that is in conflict with what you are allowed to be doing, you just negated the purpose of earning extra income. Depending on your employer and their view of you doing these types of activities, you may have to go outside of the area where you are working which may be viewed, in their eyes, as direct competition to what they are paying you to do for your day job.
Another option for earning additional income would be to seek teaching opportunities either at local college of pharmacy that may pay you an honorarium or another health professions program (e.g., nurse practitioner, physician assistant, pharmacy technician, or podiatry) that is in need of pharmacist expertise. If you love teaching and the idea of shaping future practitioners, this is a fantastic opportunity since you will see and feel value in that aspect of the work. However, if you are looking at this as a primary revenue stream, I would use great caution here as your preparation time for class and grading afterwards (if required) will likely be much greater than the time you are being paid to be in class.
If you enjoy writing and are considered an expert in your practice area, you could consider writing CE articles and/or speaking opportunities through various trade journals and state and national professional organizations. Similar to teaching opportunities, if you factor in your total time spent in relation to payment, this usually does not come close to an hourly rate for a pharmacist but could be an excellent way to build your brand which could lead to additional opportunities.
Last, it is important not to lose sight of the things you can do within your current job to increase your income, including, but not limited to the following: (1) asking for a raise if you feel it is warranted; (2) seeking opportunities for a promotion within the organization; (3) gaining additional credentials (such as your board certification) that may allow you to earn additional income in your current position and/or be more attractive for a different position.
Passive Income
Generating passive income (where you are not trading your time for money) seems to be all the rave these days. I think there is a grandiose and unrealistic vision in many people’s mind of a NY Times best selling author sitting on the beach sipping margaritas while the income from book sales comes rolling in. While passive income can seem attractive on the surface (and certainly can be over time), what we often don’t see and hear as much about is all the time, sweat, tears and failures that occur all the way up until the point someone is making “passive income.” Before something ever becomes available for sale, there has been countless hours put behind creating whatever product is being launched.
Caution: If your financial situation is such that you are trying to pay off debt, build an emergency fund, or get any part of your financial foundation in place, any efforts towards building a business that has passive income should not cost you a lot of money. However, if you have time and that can be your main currency of investment to get this venture off the ground, go for it!
So what are some common examples of passive income that pharmacists could explore?
Writing a book in your area of expertise. If you enjoy writing, this could be incredibly rewarding while providing some ‘passive income.’ I put passive income in parentheses because after you account for your time in writing and editing, you might be making closer to minimum wage than you would be a pharmacists salary. However, once you get the first version off the ground, if you are successful in building an audience to promote your product, the true benefits of the passive aspect start to become reality as time goes on.
Starting a blog. While you may not see a blog as having passive income on the surface, a blog can become a foundation for advertising and promoting other products that you create over time (e.g., book, online course, podcast, etc.). Most blogs are not successful in earning money because of the time it takes to keep up with writing on a regular basis and promoting that content to effectively build an audience that cares enough to keep coming back (and hence, be interested in buying something else you are selling).
Developing an online course. Pharmacists are very used to the idea of completing CE hours and attending certificate training programs, so developing an online course could be a worthwhile endeavor. For example, maybe you are an ID specialist with extensive experience in developing antimicrobial stewardship programs. Could you develop an online training program for $99 (or whatever price you decide) that teaches others how to develop, implement and evaluate an antimicrobial stewardship program? Maybe you could even partner with a state or national organization to help you promote this program and in turn share the revenue.
Building a membership site. This one may be harder to visualize than the others mentioned above but the idea here is to create exclusive content that provides tremendous value in return for regular payment (e.g., monthly fee). For example, maybe you are a pharmacy educator that has years of experience developing classroom materials, test questions and other assessment activities. Could you develop a membership site, where for $9.99/month, faculty from across the country could join to get exclusive tools/resources to help them in their own teaching experiences? Maybe you could even create a separate forum where only those that pay for the membership site could pose questions where you or others in the membership site respond to help them with their teaching needs, to give feedback on test questions, etc.
Investing in real estate. We are getting outside the pharmacy box now to look at opportunities for passive income that you could generate without having to wait until you are old enough to access your retirement funds. If you are in a financial position to do so, you could look at owning a second property in the town you currently live or a place you vacation regularly. Ideally, this property would be rented out at a rate that would cover at least your mortgage , taxes, insurance, and maintenance on the home. I have heard both the lucrative and horror stories of real estate investing so make sure to do your homework before jumping into this opportunity. One of my classmates from Ohio Northern University, Ben Holter, wrote an excellent blog post on this topic that is worth checking out if you have not already done so (Real Estate: The Investment You Should Not Overlook).
Affiliate marketing programs. In short, affiliate marketing programs allow you to promote another product in return for a percentage of that sale. For example, Amazon has an affiliate program where you can sign up to promote a book (or other content as well) and in return get a certain percentage of all sales purchased by the individual clicking to buy that product (using your unique URL). While one way to take advantage of affiliate programs is to be an affiliate for someone else’s product, another way is to leverage affiliates for the product you are trying to promote. For example, maybe you are promoting a recent book you published and you have several other pharmacy colleagues that help you promote the book and in return (through a unique URL identifying that individual), they receive a portion of the sales. While you are giving up some of the revenue, you are likely having a broader reach than you could have had on your own.
Examples of Pharmacy E-Entrepreneurs
If you are a pharmacist thinking about starting up a side business (or even side hobby that may turn into a business over time), one of the best steps you can take is to see who else is out there in the pharmacy community doing this type of work. Besides checking out the work Dr. Blair is doing with her business BT Pharmacy Consulting, here are some others for you to explore:
Eric Christianson, PharmD, BCPS, CGP – creator of Med Ed 101; a popular education site for pharmacists and pharmacy students preparing for board certification or the NAPLEX.
ID Stewardship by Timothy P. Gauthier, PharmD, BCPS-AQ ID – very popular infectious disease blog for students and pharmacists.
The Time Investment is Real…and Rewarding
From experience and talking with many pharmacists working in these areas of developing passive income streams, I can tell you that these take an incredible amount of time, energy and effort to build before you may have $1 to show for it. If the idea of spending months and hours of time with the potential of still having something fail isn’t for you, then I would suggest holding off on pursuing these options. However, if the thrill of starting something to provide a solution to a problem that you see (whatever that may be), then this may be for you!
Tax Advantages
Without getting into the weeds on taxes for the sake of my sanity and you staying awake, there are significant tax advantages of turning a side project into a business. Setting up a business structure is much easier than you think and can result in being able to deduct business expenses and employing other family members to reduce your taxable income. If you are interested in learning more about the tax advantages of owning your own business, I would recommend reading or listening to Tax Free Wealth by Tom Wheelwright.
Your Financial Homework
If you read Part 1 of this blog-series, you will remember the $1,000 challenge I put in front of you. Here it is again for those that may not have seen it or to provide some extra motivation for those that have accepted this challenge.
In the next 90 days, make a commitment to earn $1,000 beyond your current income to throw directly at your top financial goal for the coming year. Whether that goal is debt repayment, saving up for a home, saving for kids college, opening a Roth IRA or something different all together, I am confident the momentum you will get from $1,000 going directly towards you goal will catapult you into doing more. Once you do this, share your success with me at [email protected]
So what would an extra $1000 (net income after taxes) do for you in 2017?
If you don’t have an emergency fund in place, it would be a great way to get together a ‘starter’ emergency fund that you can build upon over time. This could help give you peace of mind knowing that in the event of an emergency, you have some buffer to take on an expense without having to take on more debt.
Or how about retirement savings? 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 newborn. If you were to start saving $83/month for your 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.
Talk about BIG WINS with a small start…start the momentum TODAY!
Looking for more side jobs for pharmacists or ways to make extra income?
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.
In this 2-part post, I am going to address (1) why pharmacists should look at opportunities to maximize their income and (2) practical ideas for getting started with earning extra income.
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!
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.
This debt free story was written by Brent N. Reed, PharmD, BCPS-AQ Cardiology, FAHA. Dr. Reed received his Doctor of Pharmacy from the University of Tennessee College of Pharmacy in Memphis, TN and then completed a pharmacy practice residency and cardiology specialty residency at the University of North Carolina Hospitals in Chapel Hill, NC. He currently serves as an assistant professor at the University of Maryland School of Pharmacy and a clinical pharmacy specialist at the University of Maryland Medical Center, where he practices in the areas of advanced heart failure and cardiac transplantation.
As a faculty member at the University of Maryland School of Pharmacy, I’m frequently reminded of the concern students have for their loan debt. In one exercise in particular, I ask first-year students in my professionalism course to reflect on the opportunities and challenges facing them upon graduation, and loan debt inevitably rises to the top. The shadow it casts is so dreadful that students often cite it as a reason for ruling out potential career opportunities (e.g., post-graduate fellowship or residency training) that they might have otherwise considered.
I faced many of these same challenges when I first walked across the stage and accepted my diploma, but I’m here to share a reason to stay optimistic – it can be done, no matter which career path you choose. This past July, after two years of postgraduate training and five years of throwing every cent at my student loans, I’m proud to finally be debt-free. Below is the story of how I did it.
I graduated pharmacy school with a little over $90,000 in debt. Although I was fortunate to have not had any debt from my undergraduate studies, most of my loans from pharmacy school had interest rates of at least 7% – hardly what many would call “good debt.” Despite this impending burden, I was determined to complete residency training, which provided me several repayment options since I would only be making about $35,000 per year. By the time I entered residency in 2009, few lenders offered a deferment option (i.e., where trainees are not required to pay and their loans do not accrue interest), and mine was no exception. However, forbearance was an option for me, where I could opt out of making payments (which I could not afford at the time anyway), but my loans would continue to accrue interest. Doubting that there would be any point during residency where I would be able to make the minimum payment, I selected this option. Over the course of my two years of residency training, my debt grew to about $102,000.
Even though this was a little overwhelming at the time, I had made two important realizations. First, my parents were still only making about $35,000 per year as teachers of over 20 years (this is in the South, after all), and they had still been able to pay off their student loans, purchase a home, and raise two children. Second, I had lived fairly comfortably off of my resident salary. Now that I would be earning over three-fold that amount as a pharmacist, I realized that I could put a significant amount of that towards my student loans each month. In that moment, my strategy for loan repayment was born – I was going to live like a resident for the next five years.
Admittedly, living like a resident when it was no longer necessary did require some discipline. During my training, I avoided spending a lot of money because I simply could not afford to; as a pharmacist, it took willpower to make these same decisions. For example, it meant purchasing a reliable but economical car and renting a comfortable but not luxurious apartment. I also needed to account for several new expenses, including a car payment and monthly contributions to my emergency savings account. Nonetheless, I created a monthly budget using what I required during residency as a guide. I did splurge on a couple of items – a gym membership and music lessons, namely – but I considered these long-term investments in my health and well-being and well worth the expense. Even after accounting for these and other expenses, I not only had enough money to make minimum payments on my loans – I had double the amount.
To put this extra money to work, I used the avalanche approach, which is similar to the snowball method popularized by Dave Ramsey, only in the opposite direction. I had eight separate loans, each with a slightly different principal and interest, and my monthly minimum payment was the combined total of the minimum payments for each individual loan. Each month, after paying the combined total, I would put any remaining money towards the individual loan with the largest principle and highest interest rate. I continued to pay down this loan each month with extra money until it was completely paid off. Whatever amount that freed up in the total minimum payment (a substantial amount since it originally had the largest principal and highest interest rate), I would then add that to the extra money I would pay towards the loan with the next largest principle and next highest interest rate. Although the total amount of money I paid each month never changed, the amount I was putting towards the minimum payment decreased over time as the amount of extra money increased. Although it took me over a year to completely pay down the first loan, I paid off my last loan in less than four months.
To help preserve the extra money I could put towards my loans, I set-up autopay for my monthly bills and created automatic savings accounts to transfer funds from my main account with each paycheck. I had automatic accounts set up for emergency savings, professional use (e.g., memberships, conferences), personal use (i.e., large but infrequent personal expenses such as vacations, gifts, etc.), and extra loan payments (for the strategy outlined above). Automatically transferring these funds to separate accounts minimized the amount of money left over for indiscriminate purchases. Similarly, any unexpected windfalls (e.g., tax returns) were immediately distributed among savings accounts or put towards my loans so as not to influence my long-term spending habits.
In conclusion, it might seem like the strategy of living like a resident meant denying myself a lot of enjoyment for the first five years after residency. Although it certainly influenced my financial decision-making (for example, taking domestic rather than overseas vacations), I saw it more as a deferral rather than a denial. Besides, five years is hardly a price to pay for the sense of relief and financial security that comes with no longer seeing a loan bill every month. Although postgraduate training prevented me from being able to tackle my loans immediately after graduation, it did allow me to pursue a personally satisfying career and it taught me the discipline necessary for an effective long-term loan repayment strategy.
This post was written by Nick Ornella, PharmD. Nick is a 2009 graduate of Ohio Northern University. After paying off his student loan debt, Nick started to save to make his dream of taking one year off of work to travel the world a reality. You can follow his journey on Instagram (@nickornella) or Facebook. If you have any questions for Nick, you can e-mail him at [email protected].
“The wind was howling, temperatures in the single digits, darkness all around us. We set out across the glacier, shivering. I was chugging along, singing songs in my head to keep my mind off the cold, one cramped boot in front of the other, using my ice axe to balance myself, carefully stepping over bottomless cracks in the ice. Eventually, the sun started to shed some light, dawn was approaching. I began to notice the low lying clouds blanketing the land all around the mountain, peaks and valleys of white clouds undulating as far as the eye could see. What was at first just a faint light, turned into an incredible sunrise. Different shades of yellow, orange, and red lighting up the sky and the clouds down below. It was stunning. I was having the time of my life.”
This is an excerpt from a journal entry I wrote about my climb of Mt. Rainier in Washington this past August; from a journal full of stories that would not have been possible had I not achieved financial freedom. I got out of debt as quickly as I could, and I saved up as much money as I could, allowing me to fulfill my dream of taking one year off of work to travel the world.
I graduated from pharmacy school with much less debt than most pharmacists, thanks to some hard earned academic scholarships and two hard working parents, Pete and Celeste, but I was still in the mindset of paying off my student loan debt as quickly as possible. I lived at home with my parents for 10 months after graduating. I took a higher paying job with a large chain pharmacy, passing up an opportunity to work in a small hospital at a lower salary. I received a sign on bonus which I used to help pay off my loans. I picked up some extra shifts at work. I wanted to be free of the burden of loans as quickly as possible. Within one year of graduation, I was able to pay off my student loans.
Once I got out of debt, I shifted my mindset to saving as much money as possible and avoiding any more debt. I decided against buying a house or condo, opting to rent an apartment instead. I started contributing 15% of my salary towards my company-matched 401(k). Instead of just keeping money in a savings account, I took the riskier but more rewarding option of opening up a brokerage account and began purchasing some stocks and mutual funds. I established an emergency fund. I got my first credit card but never carried a balance, paying it off in full every month while earning some nice rewards points.
I have always been conscious about my spending as well. I think about a purchase before I make it and make sure I will get my money’s worth out of the item. There have certainly been some ill-advised purchases along the way, but for the most part, I’ve been able to avoid catching the consumerism bug. I have the same TV today that I purchased eight years ago. I make a smart phone last two or three years, as opposed to buying the new release every year. I have only owned two different computers my entire life. Clothes are only bought when needed, not to keep up with fashion. I rented a small one-bedroom apartment, avoiding the high cost of furnishing a house or big apartment and the high costs to heat, cool, and maintain them. I was also conscious of my day-to-day spending. Instead of ordering carry out while at work, I packed a lunch every day. I watched my spending at the grocery store and made sure to use everything I spent money on, no waste. I always buy store brand products, not name brand. All of these smaller day-to-day expenses can really add up.
After several years, I started to realize I was doing a good job at getting ahead in my finances, so I started to look into making my dream of traveling for a year a reality. I read several books and blogs about long-term travel and contacted the wise Financial Pharmacist for advice (very good advice by the way!). I crunched some numbers and came up with a budget for the whole year. I eliminated some monthly bills and moved into my friend Tony’s condo, avoiding being tied to an apartment lease. The more I looked into this year off, the more I realized it was a very real possibility, so I started to set some money aside. Within a couple years, I had enough money to finance the whole year.
All of the hard work to get out of debt, to build a nice financial nest egg, and to get a good head start on my retirement savings led me to comfortably make the decision to take a year off work to travel. It was always a dream of mine to do something like this, to break free of what society would consider a normal life, to get out and experience the world while still young and healthy.
I’m very thankful I’ve been able to achieve this goal. I spent all spring and summer out west, visiting nearly every western state and every western National Park, backpacking and camping and climbing mountains, being a kid again. I climbed Mt. Whitney, the highest mountain in the lower 48 states, as part of a fundraiser for a charity I support. I backpacked the 223-mile John Muir Trail through the beautiful Sierra Nevada Mountains in California. I spent two amazing weeks in Wyoming with my girlfriend, Alanna, and two incredible weeks in Colorado with my friends, Tony and Sam.
In September, I headed overseas and spent a fantastic week in Paris and London with my sister, Lauren. Since then, I’ve spent the past 9 weeks exploring 12 different countries and over 20 different cities in Europe, wandering through countless city streets and cathedrals, eating some of the best food in the world, and meeting some incredible people along the way. After spending the holidays at home in Cincinnati, I will be spending 11 weeks in Africa, volunteering and going on safari in Uganda, Tanzania, and Kenya.
I’ve been able to live my life on my terms, not on the terms of Sallie Mae. Achieving financial freedom has allowed me to live my dream. It can allow you to live yours.
Your Financial Homework
Your homework is a little bit different this time, no crunching numbers or coming up with budgets. Your financial homework is to dream, and if you’ve already been dreaming, then your homework is to start doing research into making those dreams a reality. Maybe your dream is like what my dream was, to take some time away from work, maybe to travel, maybe to spend a whole summer away from the stresses of work to be with your children. Maybe your dream is to ensure your children walk away from college debt free. Maybe you wish to open up a business, a pharmacy, or become an entrepreneur. Start looking into making this a reality NOW, not tomorrow. Do some research on the Internet, email or talk to people who have done something similar to what you want to do. Once you’ve begun this process of making your dream a reality, the dream will start to become reality. Once your dream is within your grasp, it will make financial freedom your top priority so you can pursue this dream. It will make your budget that much easier to adhere to. It will take away the desire to purchase things you don’t need. It will make living a simpler and more frugal life much easier. It will lead to a much more fulfilling life, a life not controlled by the burden of debt. I hope you’ve enjoyed reading about my journey.
This article was written by a former classmate of mine, Jonathan Bade, PharmD, describing the journey he and his wife (Lindsey Bade, PharmD) took to pay off $160,000 in a few short years. After paying off those student loans, they are coming close to having a paid for home and are well on their way to financial freedom! Jonathan and Lindsey are graduates of Ohio Northern University (Go Polar Bears!) and reside in the Dayton, OH area with their two children Alexa (4 years) and Jacob (19 months). Jonathan is the 340B Pharmacy Coordinator at Grandview Medical Center and Lindsey is a staff pharmacist at Ken’s Pharmacy.
Eight years have gone by, and we’re still aggressively tackling debt. Today, we’re starting to see the light at the end of the tunnel – as we are getting close to paying off our home mortgage. While not always easy, we’ve chosen to strive for financial peace. Here is the story of the journey my wife and I took to pay off our student loans and be on the path towards financial freedom.
Lindsey and I graduated from Ohio Northern University with student debt totaling $160k (I have to throw in a plug that $120k was mine) Ouch! Since I graduated a year before Lindsey, I made a decision (and was fortunate enough) to live at home with my parents my first year working as a professional. With virtually no living expenses, a nice company sign on bonus (in which every penny went to pay back loans), and putting in 50-60 hour workweeks, I was able to attack my portion of the debt viciously. I like to use the analogy “to start a fire with the sun and a magnify glass you have to keep steady on one single point.” That’s exactly what I did attacking my student loans starting from the smallest debt to largest (regardless of interest rate). Emotional wins by knocking one after the other spread like a wildfire. Quick wins! Mathematically it makes sense to go after the highest interest rate first, but emotion is what fuels our drive. The sense of accomplishment from paying off a loan gives you momentum to attack the next loan. I had been used to living on nothing like the typical college bachelor, so that’s the lifestyle I maintained.
2009 was a life-changing year for us. Lindsey graduated in May; we got married in June, and bought our first home with 20% down in July. Her small amount of debt became ours after marriage, and we continued to kill it together, smallest to largest. We became completely debt free (except for our 15yr mortgage) on New Year’s Day 2011. We remember that day like it was yesterday!
Lindsey and I continued to work full-time, and soon our focus shifted to family. She had a new professional opportunity arise unexpectedly soon after our last loan payment. She was excited to pursue it knowing it was a good fit for a part-time professional/part-time stay-at-home mom. Fast forward 5 years now and two beautiful kids later, Lindsey continues to work outside the home 12 hours a week electing to stay home and raise our one and four year old children.
Since becoming debt free in January 2011, Lindsey and I invest 15% of our own income (not including employer contributions) into retirement and invest monthly for the kids’ college since birth. All along our journey, we have given to our church and other charitable organizations. Giving is a win-win situation. You feel good when you give, plus there is someone benefiting on the other side. Not to mention, an important thing to teach the children.
Within the past year, we have really attacked our mortgage; contributing everything extra at the end of the month towards our principal balance. We now have less than 8 months until our home will be paid off (7 years early)!!! We have a giant red poster that we both see every day of the rolling balance of our mortgage. It’s a visual reminder of our progress and motivation that we are almost there! On it we have, “The borrower is slave to the lender” (Proverbs 22:7).
We all know financial problems can destroy relationships and lead to divorce. Lindsey and I want to protect something that means so much to the two of us. To help us stay on the same page, at the end of every month after the kids go to bed, we sit down and budget. We review how we did that month and set the budget for the next month. We don’t finish our meeting until we both agree on all budget categories. If something does come up in a month, we revisit the budget and decide where we’re going to take the funds from to keep our budget balanced. Every dollar of income has a purposeful agreed on assignment.
We are very goal oriented people. To help us stay motivated and disciplined, we have specific shared goals…
Fully fund our kids’ education (including college)
Pay cash for an oceanfront property
Have specific levels of net worth at certain ages
To give more freely and be outrageously generous
Retire no later than age 60, and so on.
Building wealth is 80% behavior and 20% head knowledge. Everyone knows what we should do, but do we have the discipline to do it? No matter how hard we try, we will never keep up with the Joneses. It doesn’t take an intricate investment portfolio to become a millionaire. It’s just the simple behaviors of investing, saving, and living on less than your make.
Our advice is to get rid of debt! ALL OF IT! It is so incredibly freeing not having any payments! We are financially sound, but we continue to cut our expenses because we don’t like payments… bye bye $120/mo DirectTV and hello $11/mo Hulu and free YouTube. If your employer didn’t give you a raise this year because of the ‘tough economy’, give yourself a raise! Kick the auto loan at 5% interest and get a 5% raise! It’s that simple.
Finally, we are a very spiritually oriented family. Lindsey and I want to be a good example and teach our kids how to manage money the way God intends. We always look to Christ and the scriptures for wisdom, guidance, and knowledge for anything in our lives. Do you know how much the bible references money and wealth? …Over 2000 times! Lindsey and I believe that all money and wealth is God’s; we are just the managers for Him. ‘A good man leaves an inheritance to his children’s children’ Proverbs 13:22.
So be different! Change your family tree! Don’t keep up with the Joneses. Don’t do what normal people are doing. If they’re making fun of you, you’re doing the right thing. Keep life simple and keep your priorities straight. As one of Lindsey and I’s favorite authors would say, ‘Live like no one else so later you can live and give like no one else’ (Dave Ramsey).
This article was written by a former classmate of mine, Jonathan Bade, PharmD, describing the journey he and his wife (Lindsey Bade, PharmD) took to pay off $160,000 in a few short years. After paying off those student loans, they are coming close to having a paid for home and are well on their way to financial freedom! Jonathan and Lindsey are graduates of Ohio Northern University (Go Polar Bears!) and reside in the Dayton, OH area with their two children Alexa (4 years) and Jacob (19 months). Jonathan is the 340B Pharmacy Coordinator at Grandview Medical Center and Lindsey is a staff pharmacist at Ken’s Pharmacy.
Eight years have gone by, and we’re still aggressively tackling debt. Today, we’re starting to see the light at the end of the tunnel – as we are getting close to paying off our home mortgage. While not always easy, we’ve chosen to strive for financial peace. Here is the story of the journey my wife and I took to pay off our student loans and be on the path towards financial freedom.
Lindsey and I graduated from Ohio Northern University with student debt totaling $160k (I have to throw in a plug that $120k was mine) Ouch! Since I graduated a year before Lindsey, I made a decision (and was fortunate enough) to live at home with my parents my first year working as a professional. With virtually no living expenses, a nice company sign on bonus (in which every penny went to pay back loans), and putting in 50-60 hour workweeks, I was able to attack my portion of the debt viciously. I like to use the analogy “to start a fire with the sun and a magnify glass you have to keep steady on one single point.” That’s exactly what I did attacking my student loans starting from the smallest debt to largest (regardless of interest rate). Emotional wins by knocking one after the other spread like a wildfire. Quick wins! Mathematically it makes sense to go after the highest interest rate first, but emotion is what fuels our drive. The sense of accomplishment from paying off a loan gives you momentum to attack the next loan. I had been used to living on nothing like the typical college bachelor, so that’s the lifestyle I maintained.
2009 was a life-changing year for us. Lindsey graduated in May; we got married in June, and bought our first home with 20% down in July. Her small amount of debt became ours after marriage, and we continued to kill it together, smallest to largest. We became completely debt free (except for our 15yr mortgage) on New Year’s Day 2011. We remember that day like it was yesterday!
Lindsey and I continued to work full-time, and soon our focus shifted to family. She had a new professional opportunity arise unexpectedly soon after our last loan payment. She was excited to pursue it knowing it was a good fit for a part-time professional/part-time stay-at-home mom. Fast forward 5 years now and two beautiful kids later, Lindsey continues to work outside the home 12 hours a week electing to stay home and raise our one and four year old children.
Since becoming debt free in January 2011, Lindsey and I invest 15% of our own income (not including employer contributions) into retirement and invest monthly for the kids’ college since birth. All along our journey, we have given to our church and other charitable organizations. Giving is a win-win situation. You feel good when you give, plus there is someone benefiting on the other side. Not to mention, an important thing to teach the children.
Within the past year, we have really attacked our mortgage; contributing everything extra at the end of the month towards our principal balance. We now have less than 8 months until our home will be paid off (7 years early)!!! We have a giant red poster that we both see every day of the rolling balance of our mortgage. It’s a visual reminder of our progress and motivation that we are almost there! On it we have, “The borrower is slave to the lender” (Proverbs 22:7).
We all know financial problems can destroy relationships and lead to divorce. Lindsey and I want to protect something that means so much to the two of us. To help us stay on the same page, at the end of every month after the kids go to bed, we sit down and budget. We review how we did that month and set the budget for the next month. We don’t finish our meeting until we both agree on all budget categories. If something does come up in a month, we revisit the budget and decide where we’re going to take the funds from to keep our budget balanced. Every dollar of income has a purposeful agreed on assignment.
We are very goal oriented people. To help us stay motivated and disciplined, we have specific shared goals…
Fully fund our kids’ education (including college)
Pay cash for an oceanfront property
Have specific levels of net worth at certain ages
To give more freely and be outrageously generous
Retire no later than age 60, and so on.
Building wealth is 80% behavior and 20% head knowledge. Everyone knows what we should do, but do we have the discipline to do it? No matter how hard we try, we will never keep up with the Joneses. It doesn’t take an intricate investment portfolio to become a millionaire. It’s just the simple behaviors of investing, saving, and living on less than your make.
Our advice is to get rid of debt! ALL OF IT! It is so incredibly freeing not having any payments! We are financially sound, but we continue to cut our expenses because we don’t like payments… bye bye $120/mo DirectTV and hello $11/mo Hulu and free YouTube. If your employer didn’t give you a raise this year because of the ‘tough economy’, give yourself a raise! Kick the auto loan at 5% interest and get a 5% raise! It’s that simple.
Finally, we are a very spiritually oriented family. Lindsey and I want to be a good example and teach our kids how to manage money the way God intends. We always look to Christ and the scriptures for wisdom, guidance, and knowledge for anything in our lives. Do you know how much the bible references money and wealth? …Over 2000 times! Lindsey and I believe that all money and wealth is God’s; we are just the managers for Him. ‘A good man leaves an inheritance to his children’s children’ Proverbs 13:22.
So be different! Change your family tree! Don’t keep up with the Joneses. Don’t do what normal people are doing. If they’re making fun of you, you’re doing the right thing. Keep life simple and keep your priorities straight. As one of Lindsey and I’s favorite authors would say, ‘Live like no one else so later you can live and give like no one else’ (Dave Ramsey).
You cut your lifestyle expenses down to as little as possible and paid off your student loans way ahead of schedule?
You got serious about saving for an emergency so you are ready when the inevitable happens?
You waited 1, 2 or 3 more years to buy that home so you could have 20% down rather than taking on a mortgage with little or no down payment?
You paid yourself first by putting away 15% of your monthly paycheck towards retirement?
You set financial goals for the next 6-12 months, 1-5 years and 5 years or more? Actual goals with real numbers and real dates.
You got serious about setting a budget each month that put those goals into action?
You gave 10, 15, or 20% of your income to your church, nonprofit organization or some other cause that is important to you?
You had the hard conversations with your spouse about money and planned together rather than continually being frustrated with one another that you’re not on the same page?
You got rid of that car that is getting in the way of achieving other financial goals?
You convinced yourself you didn’t need to live like a pharmacist despite making a pharmacist salary?
We can hope our debt goes away and doesn’t impact the rest of our life, hope we have enough saved for retirement, hope we don’t have an emergency, hope there is some left over to give and hope the housing market doesn’t go down in value after buying a home with little or no money down.
Or…we can choose to cut our lifestyle and put in a budget in place to help pay down the debt, choose to pay ourselves first and make retirement a reality rather than a wish, choose to make giving a priority, choose to have a fully funded emergency fund knowing we will be ready when the time comes, and choose to take the time to save 20% down when buying a home.
Now is the time…to take control of your personal finances rather than reacting to what comes your way. Each of these are a choice, some harder than others, but nonetheless a choice.
The following post was written by Eric Christianson, PharmD, BCPS, CGP. Eric is the creator ofMed Ed 101, a popular educational web site that focuses on helping students and pharmacists prepare for licensure and certification exams. You can subscribe to his blog athttps://www.meded101.com/blog/. You can also follow him on Twitter (@MedEd101) where he provides updates that will help you stay current in your practice. He is the author ofPharmacotherapy: Improving Medical Education Through Clinical Pharmacy Pearls, Case Studies and Common Sense. I hope you find his story about becoming debt free and lessons learned as inspirational as I did!
Pharmacy student loans have felt like a black cloud in my life, but I try to look at the good in every situation. I learned a lot about what two people (my wife and I) working together could accomplish.
I graduated in 2009 from pharmacy school with $145,000 in student loan debt. It took my wife and I about 7 years to pay off those loans. There were a lot of ups and downs throughout the process, but we had a goal, made sacrifices that a lot of people don’t, and have found out what we can now do with an extra $2,000 – $3,000 per month!
The Downs
Throughout a multi year process of paying off debt, you run into all sorts of unpredictable life events. Being married, having a couple of wonderful children, and owning a home really impacts the finances. A couple of major things that happened to us were that we added an egress window to a basement room so we had enough room in our house for a second child. We also redid shingles on our home and needed to buy a used (new to us) car. Other less expensive things that happened were appliances that stopped working. We had to replace a washer, dryer, and stove over a five-year period. We may have been out of debt quicker without these expenses that probably cost us $20,000 – $25,000 total.
The Ups
I found joy in the little targets. Every $10,000 dollars paid was exciting. Breaking the $100,000, $50,000, and $10,000 barriers were really exciting and made me feel like progress was being made. Shorter-term goals were important for us to keep going and helped us look back and realize how far we had come. We had plenty of personal ups including the birth of our two children, several family weddings, and a couple of long weekend trips to warmer climates during the winter.
Lessons Learned Along the Way
# 1 – Define a dream versus a goal. If your plan is waiting for a distant relative to die and leave you a million in the bank, you will be disappointed and have wasted a lot of time and energy thinking about it. Trust me, thoughts like this have crossed my mind. Dreams mean nothing without action behind them. Start with the end in mind. Setting a long-term goal with short-term targets along the way helped me get excited and focused on a way forward. Write out a plan and take control.
# 2 – Discipline. No, we are not going out to eat tonight was something I had to tell myself and negotiate with my family.
# 3 – Revenue, Taxes and Expenses. Our family Pre-Tax income varied from the upper 90’s/year to the 140K range throughout this 7 year period of paying off debt. Expenses went up with children, and don’t forget about taxes!
# 4 – Sacrifice. To those who say you can’t live without a smart phone, you are wrong. Call me what you will, but I just purchased my first smart phone a few months ago. There were certainly times of discomfort and near embarrassment because of this fact, but it saved our family in the neighborhood of $100-200/mo. We also lived in a modest home and drove vehicles 8-10+ years old. I picked up extra hours as well as started a side business.
# 5 – What really matters? As I have gained more life experience, I have accumulated a greater appreciation for what really matters. If you have ever had a sick child, friend, or other family members, you understand how much you would give up for health. While my financial health felt pretty ill for a while, my family has overall been blessed with incredible physical health.
# 6 – Control. Your car breaks down, the washer quits, or wallet gets stolen are all things that are out of your control. Do your best to take action and fix the situation. Expect the unexpected and recognize the only thing in life you can control is your actions.
# 7 – Financial Freedom. Freedom is a great word. Money is not everything, but what money can do is provide you more freedom to live a happier, more fulfilling life.
# 8 – Interest sucks. My parents talk about interest rates in the “teens” and I can’t even imagine that. On $100,000 of debt, at a 5% interest rate, you will pay about $417/month in interest alone. Take that same $100,000 at a 10% interest rate and you will pay $833/month in interest alone. I realized how lucky I was to have a 4% interest rate.
Your Financial Pharmacist Comment: What an inspirational story of going from $145,000 in debt to $0 within a 7-year period despite a growing family and significant unexpected expenses. It was clear Eric and his wife had a mindset of controlling expenses while getting creative about bringing in more money by starting a side business. The double whammy of cutting expenses while bringing in more income helped him get out of debt and be on a path to financial freedom!
Approximately 5 years ago, just before my first son Samuel was born, Jess and I took the plunge into minivan land. Yes, we did it.
In those moments when the kids are screaming, crushed Cheerios are all over the floor, the dog is whining and we feel like we have lost every ounce of cool we once had, I like to imagine that I am the dad in the Toyota Swagger Wagon video. I know I’m not, but please, don’t burst my bubble.
“It’s the Swagger Wagon. I got the pride in my ride.”
Anyways, I have to admit that minivans are pretty awesome. Lots of cargo space, easy in and easy out and yes, very comfy indeed. In fact, Episode 356 of the Radical Personal Finance podcast dedicated a whole episode to why everyone should consider a minivan, regardless of having kids. You should check it out. His analysis is very detailed and entertaining.
If you have been following this blog, you know by now that the sliding door on my 2005 Honda Odyssey fell off this summer. I wrote about this in an article talking about whether or not you should save an emergency fund within a Roth IRA. My friend Jonny helped save the day, but nonetheless, it was time for Jess and I to look for a new Swagger Wagon.
After much searching, we landed on a 2009 Honda Odyssey EX-L. It is pretty sweet. The DVD player has surround sound that will make any kid hush for an hour or two if you keep them happy with some snacks along the way. The leather seating is smooth, the rear lift gate is clutch when you are trying to hold a kid and get groceries out of the back and the seats are extra comfy. It has some Swagger. For real.
As I reflect back on this purchase, there are 5 lessons about buying and owning a car that were reinforced for me throughout this buying process. Here they are.
Lesson #1 – Cash is king.
If you have ever paid cash for a car, you will know what I am talking about here. It is a rush. I don’t know what the rush of smoking cigarettes feels like, but I’m sure that those same dopamine reward pathways were activated for me when I bought that car. Walking away from a car dealership without a car payment is an amazing feeling. There are two main reasons I think cash is king when it comes to buying a used car. First, Jess and I have done this three times now and it certainly has given us a leg up in the negotiation process with the dealer. Second, while interest rates on new cars continue to be historically low, those low interest rates don’t carry over to a used car. According to current rates listed by Bankrate, used car interest rates can be upwards of 5% with good credit.
Lesson #2 – Patience pays off (literally).
Jess and I had been talking about buying a new minivan for over a year after we had a couple issues here and there with our old 2005 Odyssey. Despite some well-intended heckling from our family about the old minivan, the issues were not mechanical and were not urgent. Therefore, we kept piling away the cash so we could wait to find the best value instead of having to prematurely react in the moment when it would became urgent. The result was searching for months and finally finding the van with the best deal for the mileage and amenities.
When you are not in an urgent situation to buy, it is easy to say no when the dealer is not willing to negotiate down to the price you want. You are in the driver’s seat. By not rushing, I estimate we saved at least $1,000 – $2,000.
Lesson #3 – An educated offer makes the negotiation easy.
Negotiating with a used car dealer is about as painful as it gets. There is no doubt that it is a game you have to play if you want a good price on a used car.
When I bought our newest minivan, Jess and I had looked at every Honda Odyssey in our price range within a 100-mile radius of where we live. In addition, we had the Kelley Blue Book values ready and had purchased the Car Fax report. Based on this information, we had completed our own analysis of what we thought the car was worth and what we were willing to pay.
I started the negotiation with that in mind and after clearly communicating that price and how I arrived to that number, it took almost all of the back and forth negotiations out of the game. They tried to counter and I said ‘no thanks’ based on the price we had in mind. I let them know we weren’t in a rush to buy and if it worked out, great, if not, that was okay too.
I got a call back the next day accepting our original offer.
Lesson #4 – A used car is superior.
We all know that new cars are a bad investment that depreciate in value the second you drive them off the lot. It is wise to be putting money in assets that grow in value (investments, real estate, etc.) rather than those that lose value (e.g., cars). On the other hand, it is so hard to say no to a new car. There are few things like the smell and feel of a new car.
If you can have the discipline to say no to the new car, it will pay off.
Carfax estimates that a car loses approximately 10% of its value the minute you drive it off the lot. Within the first 5 years, that car will lose approximately 60% of its value. Why not let someone else do the driving that loses the value and you can pick up from there?
Here are some examples of price differences between new (base MSRP price) and good (reliable and safe) used cars at the time of writing this article:
Example 1 (Honda Odyssey)
New 2016 Honda Odyssey EX-L = $36,200
Used 2014 Honda Odyssey EX-L with 38,000 miles = $19,995
Price difference = $16,205 for 2 years and 38,000 miles (44% savings)
Example 2 (Nissan Altima)
New 2017 Nissan Altima 2.5 S = $22,900
Used 2014 Nissan Altima 2.5 S with 35,000 miles = $12,300
Price difference = $10,600 for 3 years and 35,000 miles (46% savings)
Example 3 (Ford Fusion)
New 2017 Ford Fusion SE = $23,365
Used 2014 Ford Fusion SE with 47,000 miles = $10,900
Price difference = $12,465 for 3 years and 47,000 miles (53% savings)
Lesson #5 – Do the math (leasing vs. owning).
Lease deals can seem very attractive if you are only looking at the monthly payment. With few exceptions, I would argue a good used car is a better deal in the long run. If you are willing to drive something used, give up a little bit of style and swag, hold onto it for the long run, deal with some repairs here and there and have an emergency fund in place to cover those repairs, the used car generally wins.
So, how do you know which is better? Purchasing a used car or leasing a new car?
Do the math on what you will pay for a leased car per month plus the initial down payment and compare that to your total purchase price for a used car. For the leased new car, it probably isn’t a bad idea to include a little bit extra for those fees you may have to pay when turning in the car for some dings or overage on miles. For the used car, it probably isn’t a bad idea to include some extra money for a few repairs you may have to take care of along the way.
Let’s look at a lease example for a Honda Odyssey based on their current offers. They are offering a 2016 Honda Odyssey LX for $259/month for 36 months with $3,199 due at signing. This rate is for those that qualify based on a good credit score. Others may have a higher rate without good credit. Total payments at the end of 36 months would equal $12,523 ($3,199 due at signing plus 36 months of payments at $259/month). This of course assumes no additional money due when turning the car in for dings and no overage on the 12,000 miles allowed per year.
Instead of this lease, a quick search on www.cars.com reveals that you could buy a 2011 Honda Odyssey EX (a model up from the LX) with 60,000 miles for approximately $12,000. So, yes, you are giving up the features and feeling of a new car but for the same total investment, you own the vehicle when it all said and done. After 36 months, it might appear to be a financial wash but it is far from it because you own the car and could turn around and sell it or hold onto it without making any monthly car payments. This is where the savings comes in! Every month that goes by after 36 months without a car payment is winning! Even after factoring in some cash for repairs here and there, it is a better deal.
Your Financial Homework
So, there it is. My lessons learned from purchasing my second Swagger Wagon. According to Experian, the average car payment on a new vehicle in the US is $493 per month for those that own and $412 per month for those that lease. If you are trying to make progress on saving for retirement, paying off debt, saving for an emergency fund or buying a house, a big car payment can be a significant barrier in the way of you making progress on one or more of those goals.
Is it time to make a switch to a good, reliable used car? If so, start a monthly savings plan within your current budget to save up enough to pay cash for that car. Once you go used with cash, you won’t go back.
